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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 139 xii HOUSE OF LORDS House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE JOINT COMMITTEE ON THE DRAFT GAMBLING BILL
Tuesday 3 February 2004 MS MOIRA BLACK and MR MARK HARRIS MR MICHAEL GRADE, MS DIANNE THOMPSON and MR PHIL SMITH Evidence heard in Public Questions 1149 - 1305
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Joint Committee on the Draft Gambling Bill on Tuesday 3 February 2004 Members present: Mr John Greenway, in the Chair
Memorandum submitted by National Lottery Commission
Memorandum submitted by Camelot
Examination of Witnesses
Witnesses: Ms Moira Black, CBE, Chairman, and Mr Mark Harris, examined. Q1149 Chairman: Good morning. May I first of all welcome Moira Black, CBE, the Chairman of the National Lottery Commission, and Mark Harris, the Chief Executive of the Commission. May I also ask you to note that Chris Bone from the Bill team is present at the meeting on a speak-if-spoken-to basis. I am going to ask you all to note that a transcript of the meeting will be produced and placed on the internet within about a week. Will you also please note that a full declaration of interests of members of the Committee was made at the beginning of our first meeting. That information is public and a note of those interests is available. Can I also remind witnesses and members of the Committee to speak up, as these rooms do not have particularly good acoustics. Can I also remind witnesses that you are not all obliged to answer every question, although today we have fewer witnesses than has been the case on other occasions. Everyone is reminded to please turn off your mobile telephones. Can I begin by asking you what you are hoping for from the clauses on the National Lottery in relation to the draft Bill that have yet to be published by the Department? Ms Black: We are hoping for three things. One is the flexibility to enable us to design a more effective competition next time round. The second is a more appropriate structure for the National Lottery Commission itself. The third is greater clarity on what is and is not a lottery for the purposes of the National Lottery. I add that rider because I think a clause was drafted defining a lottery, and it was explicitly stated not to apply to the National Lottery, so we are looking for a bit more clarity on that point. Q1150 Chairman: So clarity to enable lottery operators to run games that are different to the ones now? Ms Black: Clarity which enables us, when an operator comes to us with an idea for a game, to decide whether or not it is a lottery, because if it is not a lottery, we cannot license it. So it is a prerequisite. Mr Harris: Also clarity so that other people who wish to offer gambling products know what is a lottery and therefore would not be able to offer things that are lotteries under some other form. Q1151 Chairman: But it is not your intention that, whatever these lotteries are, no-one else can offer them? Ms Black: No. We are only interested in them for the purposes of the National Lottery. Q1152 Chairman: What is a lottery? Ms Black: Yes. Q1153 Viscount Falkland: Can I ask Moira Black in particular a question in light of her evidence to the Culture, Media and Sport Committee that the National Lottery is very different from normal gambling. Can you expand a little bit on that for us, because Lord McIntosh has come to the conclusion so far, stated to us, that playing the National Lottery is gambling. Ms Black: I would not disagree with that, but I think it is perceived by the public, and indeed is set up to be different, as the public describe it. A survey, I think three or four years ago now, showed that the public do not see the National Lottery as serious gambling. I do not know what they mean by "serious gambling", but they do not see it as serious gambling. So it is perhaps perceived somewhat differently, and it has clearly been set up to be special. It was set up by statute to raise funds specifically for good causes. It was set up to be played anywhere in the high street, and it has been set up with a monopoly operator with a fixed-term licence. So it is gambling but it is perceived by the public to be slightly different from what they might otherwise describe as gambling, and it has been set up to be special. Q1154 Viscount Falkland: You say it is perceived perhaps by the public - have you any way of measuring these perceptions? Speaking personally, I do not have that perception. I do the Lottery myself - despite a lot of concerns about changes and things, I do continue to do it, and quite enjoy it - and I consider it part of what I call my "punting activities." Nobody has asked me what my perception is. Ms Black: There way a survey, which obviously did not count you in it, that suggested that it was perceived as "fun" rather than serious. Mark, can you elaborate on that? We do not have anything terribly recent. Mr Harris: We do not have definitive evidence of that, no, but that is reported back and can be taken to some extent from other evidence that is available to us, for example, the prevalence study which identified that - I do not have the exact figures - a large number of people who played the Lottery did not play other forms of gambling. Q1155 Viscount Falkland: You can see where this question is leading: to a question later on about regulation. Ms Black: Indeed. Lord Walpole: I was just going to ask you whether you see any difference between someone buying a ticket for the Lottery and buying a scratch card. Q1156 Chairman: Is one more gambling than the other, even though they are both National Lottery products? Ms Black: I do not think I know how to answer that. Clearly - and I can see where this is leading as well - if you buy a ticket for the main Lottery draw, you have to wait a time before the draw is taken and you know whether or not you have won anything. When it is a scratch card, it takes a little while but not nearly as long as waiting for the draw, for example, my own newsagent, where you would buy a scratch card, go away and scratch it and then join probably rather a long queue to go back and collect the winnings if you have any, or indeed play a game. I am not sure I can really say very much more than that. Mr Harris: I think I would simply add that they are clearly both part of the National Lottery. We clearly accept that scratch cards are a harder and more serious form of gambling than the Saturday draw, for example. However, I believe there is clear evidence from the prevalence study, for example, that the incidence of problem gambling on scratch cards is still very low. It is slightly higher than the incidence on National Lottery products, but it is lower than other forms of gambling product. Q1157 Lord Faulkner of Worcester: I am very interested in the fact that, Mr Harris, you are referring to softer forms of gambling, and Moira Black is referring to special forms of gambling. Is the truth not that the National Lottery is somewhere in the gambling spectrum, and that some of its products compete with harder forms of gambling and other products compete with the softer forms? For example, the national draw competes with, say, the football pools, which is an equally low chance game, whereas the scratch cards operated by the National Lottery compete directly with societies' scratch cards, which to the person who buys them are virtually identical. You are very much part of this industry, are you not? Ms Black: Very much so. I do not think we would dispute that at all. Q1158 Dr Pugh: What impact do you think the provisions of the Bill will have on National Lottery sales? Ms Black: When we were looking at the Gambling Review Body's report, we identified some potentially significant impacts, as indeed did Camelot. We were concerned about side betting, which is now not to be allowed, which was going to have a fairly significant impact. We were concerned about deregulation of society lotteries, which equally was going to have a significant impact, but that deregulation is being somewhat limited. We were also concerned about the deregulation of bingo, where I do not think any steps have been taken to limit that, but we feel that the impact of bingo is relatively limited on the National Lottery itself. Q1159 Dr Pugh: Bingo represents a similar case to the National Lottery. If generally the profile is diminishing and the number of people participating is going down, how are you going to be able to tell when this legislation comes in whether it is the effect of introducing the legislation rather than the public tiring of the Lottery? Ms Black: How can you ever isolate two things like that? I am sure the statisticians would tell us, but I am not a statistician. Clearly, we could do or we could ensure that a survey is done before the legislation takes effect and monitor the impact over the years. But how we isolate whether people stop playing because of boredom, do not think they are winning enough or have better things to spend their money on, I am afraid I cannot tell you. Q1160 Dr Pugh: A sharp fall in revenue might indicate the effect of the Bill and maybe a long drawn out decline would indicate people just tiring of the Lottery? Something like that? Ms Black: You may well be right, yes. Q1161 Dr Pugh: What about the effect on big prize games? Professor Vaughan Williams' evidence indicated that these could be particularly vulnerable, particularly with the expansion of large numbers of very effective unlimited slot machines. Mr Harris: This area was looked at when we commissioned some work to advise us in commenting on the Government's response to the Budd Committee's report. At that time our advisors believed the American evidence was inconclusive, and I think Pion Consulting (?) have produced a report more recently that came to a similar conclusion. We have not had an opportunity to consider Professor Vaughan Williams' research in depth yet, but what we have available to us that was carried out by our consultants is a comparison with the Australian Productivity Commission study in 1999, and that suggested from evidence in Australia that the impact is likely to be small. We note also that the amount played by lottery players per week is a fairly small amount, so whether or not they would want to take the two or three pounds they typically play and actually go and play that on unlimited machines is questionable. Also we note that the legislation that the Government proposes on unlimited prize machines would restrict them to casinos, which are a very different environment to the high street availability. So at the moment we have not considered the Professor's study in detail, and we will obviously be looking at that, but our expectation, leaving that aside, is that the impact will be very limited. Q1162 Chairman: One of the features of this pre-legislative scrutiny process has been the extent to which other gambling outlets now are - and I will choose my words carefully - extremely nervous of the prospect of proliferation of a lot of slot machines, access to no maximum stake, no maximum pay-out. You did not indicate the concern of the National Lottery Commission that that might affect National Lottery ticket sales if there were a proliferation of machines. Do you not share that worry? Ms Black: I think - and I am sure Mark will correct me if my memory is at fault - that we have found - and I am not sure how hard the evidence is - that people who play slot machines a lot are less likely to buy lottery tickets. Having said that, if you are looking at very high pay-out machines, one must anticipate some effect on the Lottery, because a lot of people play the Lottery because they want that life-changing big number. Mr Harris: I think the key part of our response is that what we understand the Government to be proposing is that unlimited machines would only be available in casinos as opposed to being more widely available. Obviously, if there were very significant deregulation of unlimited machines so as to make them much more widely available, then we may have an increased concern. However, I have to say that the evidence from the Australia Productivity Commission, although there was a huge proliferation of machines in Australia, was that the impact on the Lottery was very limited. Q1163 Lord Brooke of Sutton Mandeville: I should declare an interest as having been the senior relevant minister in office when the National Lottery etc Bill, now the National Lottery etc Act, went through Parliament. Under the current situation, you are responsible for the regulation of a single company. Do you think that increases the chances of regulatory capture? Ms Black: The Government obviously considered this when the structure of the regulator was changed in 1999. Before then we had OFLOT, with a single Director General, obviously supported by staff. We now have a body of five commissioners, with a chief executive and staff. The five commissioners are independently appointed by the Secretary of State, who clearly can refuse to re-appoint them, or indeed, can remove them if they act improperly. We are accountable to Parliament, clearly, through our annual report and indeed appearances before the Culture, Media and Sports Select Committee, as we were two weeks ago. I suppose, in a sense - something that is a little bit nebulous - the fact that if we were not perceived to be acting independently, if we were perceived to be too close to the operator, I would expect to see some public criticism, and I am not aware of that. We certainly act independently. It is not unknown for us to fine Camelot. It is not unknown for us to say no to what they want to do. That is not a wholly satisfactory answer. I am not sure there is one. I think independence is largely down to an attitude of mind. Q1164 Lord Brooke of Sutton Mandeville: You said the Secretary of State independently appoints you. What is the meaning of the word "independently" in that context? Ms Black: In the sense that they are appointed, as I understand it, through an advert. I was not appointed quite like that; there was a full interview procedure and a lot of people were interviewed. More than that I do not think I can really add. Mr Harris: I think the key thing is that the commissioners are not appointed by commissioners; they are appointed separately by the Secretary of State, and that means that there is every opportunity for new blood, new thinking to come into the Commission when commissioners are appointed, and commissioners are unlikely to be in a position where, if they were regulatorily captured, they could appoint more people who were of a similar mind to themselves. So there is that degree of challenge when commissioners come aboard. Q1165 Lord Donoughue of Ashton: On this independence question of yourselves and Camelot, what outside agencies or advisors do you employ, and are all of these completely independent of Camelot? Ms Black: I am going to pass that largely over to Mark, but obviously auditors. We employ economic advisors. We have employed various IT consultants. Q1166 Lord Donoughue of Ashton: What about gambling advisors? Mr Harris: We have not employed gambling advisors, certainly in the time that I have been at the Commission. We have employed independent economic consultants. We obviously have our own lawyers who advise us on legal issues. We have also specialist IT consultants who advise us on IT issues and will look at Camelot's IT systems, for example. It is a condition of employment of those organisations firstly that they have absolutely no conflict of interest, that they do not work with Camelot during their time with us, and also that there is a period after they have finished working for us before they can work for Camelot. Q1167 Lord Donoughue of Ashton: I am interested that you do not employ gambling advisors. What steps do you take before licensing a new game, or permitting Camelot to launch a new game which is a gambling game, and are these steps documented? Are they available for scrutiny? Mr Harris: The legislation requires that Camelot submit an application for a new game, a written application, and although there will obviously be a period of discussion beforehand working through issues, before we issue a licence we will receive a full application, and that application needs to set out the evidence necessary for the Commission. Q1168 Lord Donoughue of Ashton: That is an application from Camelot. Mr Harris: An application from Camelot to launch a new game. That would need to set out to the Commission the evidence that the game is likely to be operated with all due propriety, that the game is likely to protect the interests of the participants - and that is not just participants in the game but also that it does not encourage excessive or under-age play - and finally, we would want to see broadly what Camelot's business case is, not to double-guess that business case but to be satisfied that Camelot has worked through it. Q1169 Lord Donoughue of Ashton: Do you take any expert advice on the information you have just described supplied by Camelot, or do you rely on the information they provide? Mr Harris: We do not simply rubber-stamp the information they provide to us. We look at it very carefully. If one takes the example of player protection issues, we would look at that both ourselves, and in so far as monies have to be secured, we would take legal advice from our lawyers to make sure the proper arrangements were there for securing. We would also discuss quite closely with GamCare, for example. If there are proposals associated with the game that we are nervous about in terms of player protection, then we would certainly expect to take advice from GamCare. If there were IT issues about how the game was being introduced, again, we may well ask our IT specialists to look at aspects of the IT provision for that game. Q1170 Lord Donoughue of Ashton: How would you assess whether a new game might result in excessive play? Mr Harris: In part, we would simply look at the nature of the game itself, and we would consider how best to take advice. It is worth saying, as you may well be aware, that Camelot has been developing its own game design protocol, which is a tool which it uses to identify the likely threat of excessive play of a game. We have had that protocol looked at independently, and we are satisfied that it produces useful evidence. What the Commission is very clear about is that it does not produce knock-out evidence, so the Commission does not simply say, "OK, it has been through Camelot's protocol, therefore it is successful." If the Commission believes that nonetheless there are still issues to be discussed, we would look at those very carefully and we would certainly expect to talk to GamCare either informally or possibly on occasion to seek their views formally on the game, and we would certainly also encourage Camelot to consult with GamCare and other specialists in the relevant area. Q1171 Lord Faulkner of Worcester: Would you not agree that all those items that you described to my colleague Lord Donoughue could equally well be performed by a Gambling Commission? In fact, it is exactly the sort of role that it would be playing with the parts of industry that it will be regulating in due course. Ms Black: We find it difficult to conceive that all our various duties could appropriately be split. Underlying everything is our duty to maximise the return to good causes. That underlies everything we do. Everything forms an integrated whole: the initial licensing; the subsequent licensing; amendments to the licensing; our compliance work; our work on player protection, which can itself lead to amendments to licences; and licences themselves may lead us to focus on compliance. But underlying everything is this duty to maximise the returns to good causes, and it is all integrated; everything informs everything else. Q1172 Lord Faulkner of Worcester: You have come exactly on to my next question, which is: is there not an inherent conflict between your player protection, which Mr Harris has described, with reference to new games and existing games, and the other duties you have, which include, as you pointed out, the maximisation of returns to good causes? You could just as easily call it the maximisation of returns to Camelot shareholders, or the maximisation of taxation to the Exchequer, could you not? Ms Black: There is something in your last point. The legislation we are working on at the moment very clearly makes two primary duties: propriety and player protection, loosely, and our duty to maximise returns is subsidiary to those two, is subject to those two, so we do not see any conflict between them. Clearly, the propriety and player protection has to come first, but then, subject to that, we are required to maximise the returns to good causes. Q1173 Lord Faulkner of Worcester: You said to Lord Donoughue that underlying everything that you do is the need to maximise the return to good causes. Which is it? It cannot be both. Ms Black: It is underlying. Mr Harris: The legislation is quite clear and we are quite clear that the first two issues are conditions precedent, so the Commission has to be satisfied that the games are likely to be promoted with all due propriety and that the interests of players are protected. If either of those preconditions are not met, the legislation makes clear, and I am sure the Commission works on the basis that the game cannot proceed to the third question, but games that satisfy the first two do fall to the third question, and the Commission does then have to consider whether or not the game is maximising returns to good causes. Although, to pick up your point, the Commission has sought a means by which the retention of the operator is closely allied to the money it generates for good causes, nonetheless, situations may well arise, certainly in considering licence competitions for the main licence for seven years to run the Lottery, but also issues will come up from time to time where the interests of the operator and the interests of good causes are not necessarily exactly the same, and in those circumstances the Commission will look very hard and will seek to achieve the best possible return it can for good causes. If that does not impact positively on the operator, so be it. Q1174 Lord Faulkner of Worcester: But there are other gambling products which also maximise returns to good causes, like, for example, society lotteries. One of the differences between society lotteries and your scratch card is that the client who buys a society lottery ticket knows exactly which good cause is going to get his or her money, whereas your money goes into the good cause pot. Yet you have resisted so far the removal of limits on society lotteries, even though the good causes would benefit from those limits being erased. Mr Harris: In response to that, what we have not done is resist that. To our mind, that is a matter of policy; that is a matter for the Government to reach a view on. Q1175 Lord Faulkner of Worcester: You put in evidence to Budd on that. Mr Harris: We did not put in evidence to Budd, no, because Budd specifically excluded consideration of the National Lottery. What we were asked to do once Budd published his report was comment to the Government and make an assessment of what the impact of various elements of Budd, like removing all limitations on society lotteries, was likely to be. We sought to assess that and to say to the Government "If you take this step, it is likely to have this impact on the National Lottery." That was intended as an issue of information for the Government to help it make up its mind whether or not to remove the limitations. We were not making a special plea for the National Lottery and saying, "This absolutely must be stopped because it would be disastrous for the National Lottery." That to our mind is very much an issue for the Government to consider. Q1176 Lord Faulkner of Worcester: What you are saying is that your good causes are worth protecting and the society lottery good cause are not. Mr Harris: No. What we are saying is the Government has adopted a policy whereby lotteries are earmarked for good causes and therefore the policy is that all good causes should be protected. There is obviously a division within that between the National Lottery and society lotteries, and that division, to my mind quite properly, is a matter for the Government. We simply sought to provide the Government with information about the impact of changing the rules and removing that boundary, or enabling that boundary to be moved. It was for the Government then to consider whether or not it wished to remove some of the limitations, and indeed, the Government has proposed to relax some of the limitations and it is keeping some of them. My understanding of the legislation that is now proposed is that it will remove a further limitation, which is the ability for society lotteries to have roll-overs. We are not objecting to that. We are not fighting it. We simply said to the Government when asked, "This is the effect we expect it to have." Q1177 Chairman: One aspect of this, which I think we would be interested in your observations on, is the fact that 28 per cent only of the National Lottery ticket sales goes to good causes, but 50 per cent of society lotteries generally goes to good causes. So you can understand the tension that there is, not just in this Committee, but I think amongst politicians generally, that one lot of good causes are being singled out for more preferential treatment than other good causes. Mr Harris: We can understand the concern the Committee might have on that. It is not a matter on which we have a view because we are the regulator of the National Lottery. We are not the regulator of lotteries generally or gambling generally. Q1178 Baroness Golding: You said earlier in answer to a question from Dr Pugh on displacement that you had not yet had time to look at the evidence that had been given to this Committee by Professor Vaughan Williams. Obviously you will need to look at it to be able to maximise the money you raise for good causes. How are you going to do this without a gambling advisor? Ms Black: We may well find we need to appoint a gambling advisor. Q1179 Baroness Golding: How are you looking at other similar evidence that has been coming in without a gambling advisor? Mr Harris: We use an economic advisor, NERA, to look at this evidence, and they look at it from an economic s background, but using evidence from elsewhere in the gambling market and evidence from lotteries elsewhere in the world. So we believe that they are adequately qualified to comment on the issues that have been raised with us. Q1180 Baroness Golding: So you believe you do not need a gambling advisor? Is that what you are telling us? Mr Harris: It depends very much on the issues that come up. Generally, so far, we have found NERA quite adequate for us - very good in fact - to advise us on the issues that we have been asked about and have had to consider. Q1181 Viscount Falkland: You have explained to us where the consideration of the returns to good causes comes in your normal procedures of examining these things. Obviously, because the good causes suffer ultimately in the situation where there is a drop in turnover, is there not a lot of psychological pressure on you there to slightly alter your priorities? What kind of pressure are you under when you get a dip, and does that not have an effect on your ultimate decisions? Mr Harris: From my perspective, it is quite clear that the Commission has the first two responsibilities that I alluded to earlier, and the Commission has to be satisfied that those are met. You ask what would happen if there were a dip in sales. There are a variety of things that the Commission would look to Camelot to do. One may be to introduce new games, another may well be to work harder at selling existing games. If one looks, although it is partial evidence, at the moment the UK National Lottery has a very low per capita rate compared with lotteries across the world for weekly purchases. So for example, across the piece, that gives us some reassurance that the National Lottery is not encouraging excessive play. However, we would look very carefully at individual games and individual proposals, and from my perspective, I would want to make sure that the Commission was fully informed about risks, for example, to players, and that it took those fully into account before taking the step of considering whether or not a game was likely to generate extra returns for good causes. Ms Black: That is very much how it feels at the Commission. We do not feel under any pressure that because sales are dropping - although this year, as you will have seen from the press, they have been holding up - we should license something simply because sales are dropping and therefore we need to do something. That is certainly not the case. Q1182 Viscount Falkland: Do you think you are the most appropriate regulator to deal with these problems should they arise with a dip in turnover and what you have just eloquently described to us, rather than the Gambling Commission? Ms Black: Yes, we do, because of that underlying duty to maximise returns to good causes. If that was all put into the Gambling Commission, and we do not believe you can separate everything we do, then the Gambling Commission would have an irreconcilable conflict of interests between the National Lottery operator, for whom it would have a duty to maximise the returns, and other commercial gambling operators for whom no such duty applies. Q1183 Chairman: I just do not understand how you can say that that conflict applies to the Gambling Commission but does not apply to the National Lottery Commission. Ms Black: It is the conflict between regulating one operator for whom we have the duty to maximise the returns, and if the Gambling Commission is then regulating others for whom it did not have the duty. Our duty is still subsidiary to our prime responsibilities. Q1184 Chairman: But if you are going to license other games, and move into the world of having more than one operator, which is what the Government says the policy would be, and what we assume these additional clauses will allow, who is going to make a judgment about the extent to which the licences that you then grant may impact on other gambling opportunities where someone may say, "Actually, there is a potential confusion here"? Your conflict is worse than the Gambling Commission's conflict, because you have this requirement to raise money for good causes. Ms Black: Yes. We have the requirement to maximise the returns, not simply to raise money per se. I wonder if I could just clarify. Obviously, we have not seen the draft clauses, so we are slightly talking in the dark. Q1185 Chairman: We know what the policy is. Ms Black: Indeed. If I can just clarify what we think our proposals are, in a sense, we do not have them right now. We are still waiting to see what happens, but I wonder if we can just comment on some rather inaccurate representations that are floating around as to what we might be doing. We are merely seeking the flexibility to enable us to structure the competition, the next one, in such a way as to make it as effective as possible. We have clearly got to consult and do research and find out what the best thing to do is. We may well end up with one licence covering everything for one operator. What we perceive as possible at this stage, although clearly, as I say, consultation and research will need to be done, is that we may end up with two or three licences - not two or three licences for a jackpot game but two or three licences each licensing classes of games that hopefully are pretty independent of each other so that we do not get competition for the Lottery, because clearly that is counter-productive. So we might have one for the main lottery jackpot type draws, and we might have a separate one for scratch cards, because research has shown that broadly there is not a great deal of competition between those two types of games. We believe that if we have that flexibility to enable us to offer that, if that is what bidders are going to bid for, we would encourage bidders who could only bid for bits rather than the whole lot, which is big - we think it would reduce their costs clearly if they are only bidding for part of it - but we think it will also encourage the innovation in the design of the games and the marketing, which is actually very necessary. It is clearly a risk, but we do perceive a serious risk if we carry on as we are and have the same competition. That is not just our view. It is talking to people at the time of the last competition, it is talking to professional bidders since, it is coming from the National Audit Office and the Accounts Committee and the Culture, Media and Sports Select Committee. If we do not do something, we will have a problem, and a something that gives us flexibility to design something a bit different. My real concern is, if we do not get flexibility, in two or three years' time, when we are some little way down the road to designing a competition for the next licence, if we find that the incumbent's advantage is simply overwhelming, it will be too late to do anything about it. Chairman: We will come on to the licensing issues in a moment. Let us stick with regulation. There are still one or two more questions on that. Q1186 Jeff Ennis: My question has more or less been asked, but we have obviously heard evidence from a significant number of witnesses that they feel that we should just have one single regulator for the gambling industry, namely the Gambling Commission, and when we look at the size of your annual budget compared with that of the Gaming Board, which is responsible for every other aspect of gambling at the present time, your budget is almost as big. Does this not show that there is a significant case to be made in terms of economies of scale in bringing the two commissions together? Mr Harris: I would say firstly that the Gaming Board, although it has a wider scope across the gaming industry, but not, of course, across the betting industry at the moment, its responsibilities are more limited. As I understand it, for example, it does not have the same degree of player protection responsibilities. It is keen to take those on and it has been looking at those areas. It does not have the same degree of responsibilities. Equally, at present, as I understand it, what is lawful gaming and what is not is left very much initially to the companies who wish to offer gaming products to determine. They bring products to the market and the Gaming Board then clearly has to express a view. But what the Gaming Board is not asked to do is to license each game, which is an additional level of protection that we are asked to introduce. So I suspect that if the Gaming Board had the same responsibilities as we have for licensing new games, new products, and for protecting the interests of players, and that was across the whole industry, then it would need a very significantly higher budget to do that. Clearly, I have to say to you, in all honesty, there would be some economies of scale if you moved the two organisations together, because, for example, you would not need the same resources division, HR division, things like that, but equally, I do not believe that they make up a massive part of our costs relative to the costs that we bear with the increased licensing regime. On top of that, of course, we have responsibilities, as has been mentioned, for overseeing maximising returns to good causes, and those sit very much within the Lottery, and they are not responsibilities that we understand the Gambling Commission would be taking on for the industry more widely. Q1187 Lord Walpole: What kind of relationship do you currently have with the Gaming Board? Mr Harris: I think we have a very good relationship with the Gaming Board. I see Tom Kavanagh on a regular basis, and we discuss issues of common interest. Those issues at the moment are not that extensive because, for example, the Gaming Board does not have responsibilities around player protection, but we certainly talk about player protection issues. We discuss issues of illegal lotteries, of policies the Government is developing as regards things that might compete with lotteries more widely. We have discussed betting arrangements where it has been appropriate to do so. I think we have a strong dialogue. We have also taken the step, in the light of the Gambling Bill ---- Q1188 Lord Walpole: I was going to say, presumably the Gambling Bill has stimulated that dialogue. Mr Harris: It certainly has stimulated it, but I would not like it to appear that this is something that we have not had in place before. I have been in contact with Tom Kavanagh on a regular basis really since I came to the National Lottery Commission in 1999. That has become more regular as time has gone on, but we continue to have a close relationship. We have recently set up, and it will be meeting for the first time this week, a standing group that will formalise these arrangements that in the past have been very much through Tom and me meeting on a regular basis. Q1189 Lord Walpole: If the National Lottery Commission continues as a separate regulator of the Lottery, how do you envisage working with the Gambling Commission? Have you considered what would happen if there were any differences of opinion? Mr Harris: Yes. I would hope that we would continue to work very closely in the way that we have done, but that the closeness, as the Gambling Commission's responsibilities become more extended and as it has an interest in player protection and things like that, could be more formalised. I would certainly personally wish to see some sort of protocol or understanding between ourselves and the Gambling Commission on how we would work in future. I would certainly also hope that we could set up joint working groups and joint arrangements, maybe for getting legal advice if there were areas of doubt about what did or did not constitute a lottery. Equally, they will have enforcement powers that we will not have in terms of lotteries, and again, that is an area I would expect to liaise with them in. So I would hope to work very closely with them. In terms of if there were a difference of opinion, I think firstly the thing is to put in arrangements that minimise the risk of differences of opinion, and if there were a difference of opinion, we would have to look at whether or not that was justified, because we are regulating something slightly different under slightly different responsibilities, if that were the case. Thirdly, I hope we would be able to work closely together to try and resolve that difference of opinion. If you take, for example, what does and does not constitute a lottery, I have already mentioned the possibility of taking joint legal advice. That may well be a way forward if both organisations could accept that if we went to an appropriate counsel and got that advice, we would be able to strike a common view. Q1190 Lord Walpole: How would you ensure that there was a consistent approach taken in the line with the Gambling Commission towards, for instance, player protection and social responsibility? Mr Harris: We have some expertise in this area already simply because we have had responsibilities in this area, and there are various codes of practice that Camelot is required to comply with under the existing licence. I hope we would bring those to the table as part of the debate, that we would work very closely with the Gambling Commission, that we would be able to sign up to joint codes of practice that reflected all parts of the industry, and at the very least set minimum standards, if not absolutely common standards across the piece. I also hope that we would be able to work very closely with organisations who have an expertise in this area, possibly beyond ours, such as GamCare, so that we could work together to come up with common standards and common expectations. Q1191 Lord Walpole: Would you expect to end up with GamCare's telephone number, for instance, on terminals? Mr Harris: That is not an impossible scenario. Certainly GamCare's number now appears on the back of scratch cards, for example. Q1192 Mr Page: If I could move a little more into the specifics of it, in the past gambling operators had more clearly defined areas of operation, and those areas of operation are becoming increasingly blurred. We have at the moment interactive lottery games available through Camelot. Have you considered how you are going to work with the Gambling Commission on the issue of remote gambling? Mr Harris: In a sense, the answer builds on the answer I have already given. We would want to work closely with the Gambling Commission in terms of codes of practice. We also would work closely with GamCare, and Camelot has GamCare accreditation for its websites at the moment. We would expect to share intelligence, standards and compliance techniques as well, trying to make sure that we had common arrangements, common techniques in place that would prevent misuse by organised crime, that would exclude under-age play, and that would minimise the risks of excessive play. I think we would want to work closely with the Gambling Commission on those issues. Q1193 Mr Page: This follows on from an earlier question by the Chairman, but again, let us go into a specific. Suppose the remote gambling operator wanted to promote an online or interactive gambling product that threatened Camelot's online scratch card game. Who would do the protection of the National Lottery product? Would it be the Gambling Commission or would it be yourself? Mr Harris: That to my mind would very much depend on the nature of the product that was being offered. If the nature of the product was that it was an entirely lawful product, then I do not think there is any reason why the Gambling Commission should intervene. If it were a threat to the National Lottery and that threat were made out, and the Government decided to change policy on what the National Lottery could and could not do, that would be a matter for the Government, but I do not believe it would be a matter for the Gambling Commission. If however what was being offered was an illegal lottery, I think the Gambling Commission would have an interest, because it has the enforcement powers. If it were not, I do not believe that would be a matter for the Gambling Commission. Otherwise, it would be being drawn into the conflict of interest problem. Q1194 Mr Page: You have mentioned that there could be two or three separate licences in the future. I know that last Tuesday, when you appeared in front of the Culture, Media and Sports Committee, you were asked questions about what would happen if Camelot wanted to go out and start a completely separate arrangement for harder gambling. Who would you expect to regulate that? Ms Black: Currently it would not be within Camelot, the company, per se. We would not currently do that. Q1195 Mr Page: Camelot could set up a separate company, operating out of the same building, doing hard-line gambling. Ms Black: That would not be for us. That would be for the Gambling Commission. Q1196 Mr Page: So Camelot, for example, would then have two regulators operating in its building. Ms Black: It would have relationships with two regulators, yes. Mr Harris: It is important to say that under the present arrangements there would be two separate companies. Under the present arrangements, Camelot as a company, under the terms of its licence, could not start offering products outside the National Lottery without our agreement. Q1197 Mr Page: But it could be the same ownership of the two companies? Mr Harris: Yes. Q1198 Baroness Golding: The section 5 licensee is a private sector body whose activities must be compliant to the Lottery. Would you insist on the same conditions once it is possible for you to grant more than one section 5 licence? Ms Black: We have not reached a view on this. Our prime concern would be to ensure that the management of the organisation that runs the National Lottery, or its bit of it if we have that possibility, has every incentive to focus purely on the National Lottery part of its portfolio. So if someone comes up with an alternative structure, we would be very happy to listen to it. Mr Harris: Our real concern is that the Lottery operator might, part-way through the licence, decide that actually there were other things that were more lucrative and of better benefit to them, and move into those other areas and neglect the Lottery as a result. That is the reason we have a single-purpose company at the moment. Q1199 Baroness Golding: That would be somebody with a different gambling interest already. Mr Harris: What we require is a single-purpose company. We do not require that the shareholding should be single-purpose. It is quite possible, for example, that a gaming operator, a betting company, could be involved as a licensee. Indeed, that was the case in the first licence round when the Rank Group, as I understand it, and also Tattershall's, were both part of different bids. But they were parts of the bid not in their own right but as a shareholder of a single-purpose entity to run the Lottery. Q1200 Chairman: Touching back on what Mr Page said, is the problem not this really? Initially the National Lottery was granted this exclusive licence to have a weekly draw, and that remains enshrined in the legislation. It is not clear - we have not had the clauses - whether the Government intends that there should be more than one weekly draw, although we doubt that with separate operators, but that the National Lottery per se, in its widest definition, should be involved in other kinds of lottery products, but those lottery products are offered by many other operators within the marketplace. Is that not the difficulty that we are getting into now with the idea that there would be several different types of games, possibly with several licences, different operators, all designed to raise money for good causes for the National Lottery fund? Ms Black: We do not currently envisage lots of licensees. We envisage, as I say, merely two or three. What we certainly do not want is different operators competing for your lottery pound, whether you spend it on this jackpot from operator A or that jackpot from operator B. Q1201 Chairman: Would the outlets all be the same as where people go now to buy their National Lottery tickets or their scratch cards? Ms Black: They could well be. We would expect them to be. We would expect them perhaps to have common terminals, if we had two different licences. Q1202 Chairman: Is there really any likelihood that anyone will show the slightest interest in bidding for the next licence round? Ms Black: We sincerely hope so. Clearly, the Government consulted before they proposed these changes. I think our real concern, for example, listening to Simon Burridge at the Culture, Media and Sport Committee two weeks ago, was when he said he would not even consider bidding under the current structure. That is our concern. We believe that if we have the flexibility to do something different, we would then clearly need to consult very widely, with all sorts of people who might bid, with the retailers who might be faced perhaps with lots of different terminals on their counters, which clearly would be unacceptable. We believe we will have the flexibility to design something that will attract more bidders in. If we do not do that, we fear we are faced with no competition. Mr Harris: It is important to be clear that what we are asking for, and I think what the Government intends from what I have seen of its policy document, is not to require the National Lottery Commission to let a range of licences. It is to give us the flexibility to do so. If we carry out work that satisfies us that the best option for good causes and the National Lottery generally is to have one licensee, there will be nothing in the legislation, as I understand it, that will stop us doing that, but if we come to the conclusion that actually offering another competition very much on the same terms as the last competition is unlikely to generate any real competition at all, and that the incumbent holds a very strong position that others do not wish to challenge, then it seems to us that there is a real risk in that situation, and that is where we would like to be able to apply flexibility to have more than one licence. Q1203 Chairman: I have to ask you this. The last licence round was not a spectacular success from the Commission's point of view, and that was just a straightforward two bids from two potential players for one licence. What you are saying is that you may well be granting several licences. How on earth is Parliament and the public to have any confidence in your ability to do that more complex licensing process when last time it was such a shambles? I am sorry to put it to you so bluntly, but there is a real issue of confidence in the ability of your Commission to do this task. Ms Black: The National Audit Office report clearly looked into this and concluded we had good reasons for the things that we had done. In terms of ability to run a competition which is more complex, we are not talking about lots of licences; two or three maybe. Q1204 Chairman: Only to run one weekly draw. You do not intend to run more than one. Ms Black: We currently expect - but clearly we have not consulted - one licence for the main jackpot draw, yes. We would not expect more than that, but that is obviously a part of the National Lottery. But the other bit of the legislation that we are anticipating is changes to the Commission itself, certainly in terms of size and having an appointed chairman rather than a selected chairman. Q1205 Chairman: So it would be bigger. Ms Black: We have the potential to make it bigger, and also to have our chief executive and another executive on the Commission, which we think is also important. Lord Donoughue of Ashton: More jobs! Q1206 Chairman: Carry on. Ms Black: But in terms of the complexity, with the right advisors, we do not see why that should be a particular problem, because if we are offering more than one licence, then each of them is going to be smaller. Q1207 Chairman: Will these other licences not be offering products which are available through other outlets for other good causes? That seems to me to be the confusion that you have not been able to clear up this morning. It is very black and white. You have a weekly draw. Everybody knows there is one National Lottery twice weekly, and there are several variants of it. We all understand that. Nobody else does that. They are not allowed to. The law does not allow them to do that. Then there are potentially - this is what you are saying to us - licences for other lottery games of the kind which other good causes also offer. Is that not going to be a recipe for confusion? Why should anybody want to buy those tickets when the society lotteries offer more money back to good causes than the National Lottery does? Ms Black: Obviously at the moment we already have scratch cards, which clearly other people provide, but also it appears at the moment - and clearly this may change - that the people who buy society lottery scratch cards know their money is going to be channelled to a specific cause, of course, as you alluded to before, but they tend to be somewhat more localised and to get at a more specific audience rather than the wider scratch card. But we take your point: there are lots of scratch cards out there. That is in a sense government policy, that the National Lottery ones are arguably protected. Mr Harris: There are a range of products that can be offered that fall within the definition of a lottery, and certainly from the National Lottery perspective those include scratch cards, they include the main draw games and other games based on the main draw or on other draws. All we are looking to do is to have the flexibility, instead of saying one operator shall be able to provide all these games, which includes the main Saturday game, the Wednesday game, any other games that are developed and the existing scratch card portfolio at the moment, to have operators offering discrete parts of that range of things that add up to the whole of the National Lottery. Certainly you are right to say that there are other forms of lottery that are not part of the National Lottery - society lotteries - that are able to offer lottery products. Although I do understand the limitations placed on society lotteries at present might make it very difficult to run games that are offered through retail outlets electronically - terminal-based games - there is nothing to stop them doing that. Indeed, in the past some society lotteries and society lottery managers have sought to offer those games in specific parts of the country. We are simply saying there is a range of things that add up to the National Lottery overall - a range of different games - that are quite allowed to be part of the National Lottery, and we would like to challenge the requirement that they can only be run by one operator. Q1208 Chairman: You referred to Simon Burridge and his evidence to the DCMS Select Committee the other day. He also said this: "Competition is a means not an end. The idea of having lots of different people competing for lots of different games does not necessarily make them better games, more profitable games, or more popular games". How do you respond to that? Ms Black: We would agree with his comment, but it is not an accurate reflection of what we might be proposing. We are simply looking at a very small number of games, subject to consultation and so on, and we would expect to license classes of games that, so far as we can ensure, do not compete with each other. Equally, if we do succeed in licensing different classes of games to different people, you can be jolly sure that those licensees are going to want to make sure that their games are going to be pretty independent and, therefore, cannot be cannibalised by other operators. Q1209 Chairman: Who is going to operate the Olympic model? Mr Harris: Under the present legislation that would need to be Camelot, because Camelot is the only section 5 licensee. Q1210 Chairman: That is likely to be the best opportunity of creating a splash for the public to really get interested in supporting the Lottery that we are likely to see for some time? Ms Black: You may well be right. Q1211 Chairman: The purpose of asking this is to suggest that after that it is potentially more difficult. I think this Committee is not convinced that having other operators is going to make a scrap of difference? Ms Black: It is potentially more difficult, I think we would probably agree. People tend to unite around something big like the Olympics which, arguably, makes it more important to talk to lots of other bidders and see what innovation they can bring to the game design and to the marketing. Q1212 Lord Walpole: I misunderstood something you said a moment ago. You said that your scratch cards are protected. Can you define for me "protected"? I did not quite understand what you meant. Mr Harris: Did I say that? Ms Black: In the context of being part of the National Lottery. Mr Harris: They are protected in the sense that they are part of the National Lottery. Q1213 Lord Walpole: I am confused about what "protected" means. Other people can do scratch cards? Ms Black: Yes. Mr Harris: Yes, but they are only available to organisations that support good causes; so they are protected in the sense that Lottery scratch cards cannot be offered by betting companies, for example; they can only be offered part as of lotteries and lotteries have to be either society lotteries or the National Lottery. Q1214 Chairman: I think the answer Lord Walpole may be looking for - and I understood your point to mean this - that any game which has the National Lottery label to it would have advantages in terms of potential pay-out, where limits exist on society lotteries in terms of the amount of money which can be paid in prizes; the National Lottery would not have restriction; and it would also have advantages in terms of distribution and in promotion and advertising? Mr Harris: Chairman, I do not think that was the point I had in mind when I used the word "protected". I accept that the National Lottery scratch cards are subject to different rules from those that apply to society lottery scratch cards. Clearly, the National Lottery is the bigger enterprise and the common branding and ability to offer throughout the whole range of the country through the terminal system used by the operator to promote scratch cards, as well as to promote its other games, clearly means there is a imbalance between the National Lottery's ability to promote scratch cards and probably society lotteries. Society lotteries to some degree address that through use of lottery managers who are able to group together lotteries and offer bigger portfolios, but clearly portfolios that have constraints that prevent them competing directly, if you like, or may limit their ability to compete directly, with the National Lottery. As I indicated before, those ultimately are policy decisions for the Government. We are not fighting in favour of one or the other, but we are saying for the National Lottery to be a success scratch cards are part of it. Q1215 Lord Faulkner of Worcester: Could you comment on an allegation some of us heard that some retailers are being pressurised by Camelot or its agents to remove the scratch cards of other operators? Mr Harris: We are not aware of those allegations being raised with us recently. I know that allegations were raised a number of years ago before the Commission came into being. I also know the Director General looked closely at that. I believe the current evidence is certainly that the agreement which Camelot has with its retailers does not include any such requirements. There are plenty of cases, I understand, where retailers of the National Lottery also retail society scratch cards. Q1216 Lord Faulkner of Worcester: If there were cases of that you would investigate and take action? Mr Harris: We would investigate and take action, yes, because we do not believe that the Lottery would be being run with all due propriety if the operator were undertaking restrictive practices to try and stop other products being offered. Q1217 Lord Brooke of Sutton Mandeville: Do you think the draft Bill provides an adequate distinction between lotteries and prize competitions? Mr Harris: This is an area where we have liaised closely with the Gaming Board. I think our position is the same as the Gaming Board's. We think there does need to be a clear distinction. From my discussions with the Gaming Board, I think we are reasonably clear about the free prize route and that that, as far as we can tell from the policy documents we have seen, is satisfactory. Where we have greater concerns is on the use of skill. To our mind it would probably be a stronger test if there needed to be a reasonable use of skills so that one could not have the situation, for example, where skill encompassed naming the capital of France - is it Paris, London or New York? - which might well fall under a general skill test. Certainly that is the concern that the Gaming Board has that it would have difficulty dealing with that issue. Q1218 Lord Donoughue of Ashton: First, just to tie up a previous key discussion where you conceded you had no gambling adviser. I wonder if I might suggest in the absence of a gambling adviser your main de facto gambling adviser might be Camelot itself. I wonder if you could not appoint an independent gambling adviser? There is no need to comment on that. I shall get a little more specific on scratch cards. Playing scratch cards has been likened to playing gaming machines - because both of them have the potential for instant gratification. Given that gaming machines have been strongly linked to problem-gambling in children, do you think it is appropriate that under 18s are permitted to buy scratch cards? Ms Black: I am not sure you are going to like the answer to this. The question of the age limits for the National Lottery products is really one for the Government and we do not really have a view on that. Q1219 Lord Donoughue of Ashton: You do not have a view? Ms Black: No, but having done that we are aware of some research. Q1220 Lord Donoughue of Ashton: We understand that it is not up to you, but it is interesting if you have a view? Mr Harris: We have commissioned some major pieces of research on playing of the Lottery and similar products by the under 16s through very extensive questionnaires carried out by research agencies who specialise in these areas, and looking at the behaviour of 12-15s, for example. One of the things which came out of the most recent piece of research we have done suggested that the incidence of problem-gambling on scratch cards in 12-15s is much lower than that of gaming machines. Q1221 Lord Donoughue of Ashton: You are aware of the Joseph Rowntree Foundation report and you reject that, or do you feel the other research is more impressive? Mr Harris: All I can say is, that is research we have carried out. At the time of that research there was a difference. That does not mean we accept for the Lottery that even a relatively lower incidence is acceptable. This is why, for example, we required the operator to carry out test-purchasing under the licence. Under the latest licence we doubled the degree of test-purchasing the operator was required to carry out, because we think it is a very serious issue if under 16s are playing the Lottery illegally. Q1222 Lord Donoughue of Ashton: Who did that research? Mr Harris: The research for us was carried out initially by Sue Fisher of the University of Plymouth; and the subsequent research, using a similar methodology, was carried out by an organisation called BRMB, and they carry out social research. Q1223 Chairman: By volume and value, how many Lottery tickets were bought by 16 and 17 years olds? If we were to bring the age of ticket sales and the ability to play the Lottery up to 18 what sort of impact would it have on Lottery turnover? Mr Harris: I am afraid, Chairman, I do not have that figure to hand. My suspicion would be the same as yours, that it would not be a large amount. I think our position would be that if the Government wished to raise the age we are certainly not taking the stance that we would object to that, or we would wish to see it kept at 16. It is just an issue where the Commission has always focussed on making sure that every effort is made to stop under-16s playing, rather than to take a view on where the age should lie in policy terms. Q1224 Baroness Golding: You said earlier that everything to do with this is through your economic adviser, not a gambling adviser. Surely the big thing is to prevent children getting into a state where they need GamCare. I just cannot understand your laidback attitude towards gambling and the proliferation of gambling and the effects it might have on younger children? Mr Harris: I do not believe we do have a laidback view about gambling; I think we take it very seriously. This work was not carried out by our economic advisers, we used a range of advisers, and these are advisers who were specialists in social research. They are specialists in the area of how you find out from under 16s whether or not they are playing or not playing. Q1225 Baroness Golding: I do understand that, but that is finding out whether they are playing under 16; but 16-18 can obviously be vulnerable and you do not seem to have anybody on board or any view about it at all. Ms Black: GamCare have done work on that suggesting that particularly scratch cards are very much at the end where there is less problem-gambling. Mr Harris: What we have done is look very closely, for example, at the prevalence study that was carried out a number of years ago now by GamCare which was an independent study. That showed there was a 0.8 per cent incidence of problem-gambling from scratch cards. GamCare's own hotline shows that about one per cent of calls it receives are from scratch card players. I am not sitting here saying that is entirely acceptable and we will not do anything about it. What we are saying is we continue to take what research we can, and continue to do our own research and we consider very carefully the types of game Camelot is offering before we license them. Q1226 Mr Wright: Do you think the National Lottery operator should contribute to the Gambling Industry Charitable Trust (which is now re-named The Responsibility in Gambling Trust) as a matter of principle? Ms Black: We can certainly see the benefits in this as we anticipate that the Trust will carry out work that will be of relevance to us and of benefit to the National Lottery. There are specific considerations that apply to the National Lottery. We are under direction from the Secretary of State that we are not allowed to license games that, in our opinion, would encourage people to play excessively - in other words, problem-gambling; or which did not have sufficient controls, in our view, to prevent the under-16s gambling. We, therefore, expect Camelot, and indeed ourselves, to carry out work to ensure that these requirements are met specifically for the National Lottery. Clearly, that work takes on board work in other areas and may well be informed by the work of the Trust. My slight concern at the moment, as we have said, is that it appears there is relatively little incidence of problem-gambling amongst National Lottery products; and I would expect the Trust to carry out its work to look at what it was going to do on the basis of risk. We might be rather low down on their list of priorities. Having said that, they may well do other relevant work. We cannot require Camelot to contribute at the moment under the terms of its licence; but, clearly, come the next licence, or licences, that is something we need to consider. We do need to make sure that the work we need to do gets done. Q1227 Mr Wright: With everything you have said, do you think in principle it would be right and proper for the operator to actually contribute to the Gambling Industry Charitable Trust? Ms Black: I do not have a problem with that at all. It is gambling, we agree with that, so therefore logically it should be right that the costs ought to be proportionate to the benefits that people who play the Lottery, the Commission and the operators get out of it, I suggest. Q1228 Lord Wade of Chorlton: Having listened to what you have said this morning, could you remind me of your budget and the size of your organisation, and what you might expect it to become if the various suggested changes come about? Mr Harris: Our gross budget at the moment is around £4 million; some of that is recovered but not paid into our budget through licence fees and so on and so forth. We currently employ just over 40 people. We would clearly envisage, firstly, that there will be growth in our budget, not so much the numbers of staff but the numbers of advisers, to carry out the licence competition; in any case that is a very resource-intensive piece of work and one that absolutely needs to be got right. That will be one contribution. The second contribution, which I think you are alluding to, maybe the increased complexity of regulation. That depends very much on the number of licences if the multiple licence path is authorised and that is the path the Commission goes down. I am really not in a position to give you a clear figure. We would not expect it to increase very, very significantly from the existing budget; but clearly there may need to be a degree of extra resource within the Commission to cope with that. Q1229 Lord Wade of Chorlton: You mentioned the public's perception of gambling. What do you think the public's perception of the Commission is? Ms Black: Limited. Whenever I say I am involved with the National Lottery Commission people always assume I hand out the money. I think that is a very general perception. Q1230 Chairman: That you hand out the money? Ms Black: Yes, for good causes. I think generally the public does not understand there are a variety of bodies that hand out monies to good causes and that there is a regulator. Q1231 Lord Wade of Chorlton: Is that a good or a bad thing, that the perception is limited? Ms Black: I do not think that is terribly important, to be honest. If we had a very high profile I think I might start to get worried because it might be an implication that something was going seriously wrong. Q1232 Viscount Falkland: Could you tell us how the Commission decides what is excessive play and what steps they take before they take a decision that a game does lead to excessive play? Mr Harris: We have considered but not been able to adopt a straightforward definition, a straightforward legal test if you like, of what excessive play amounts to. Q1233 Viscount Falkland: I think we all understand what it is. Mr Harris: In terms of the general proposition, we would look at the design of the game, the way it was likely to be marketed, what the proposition to the players was, and how clear that proposition to players was. If we had concerns about that game we would then seek specialised advice, where we considered that appropriate, in order to inform the Commission on whether or not the game was, in its judgment, likely to encourage excessive play. Q1234 Viscount Falkland: You would have to go to a gambling consultant for that, would you not? Mr Harris: We would have to go to specialist advisers. I am not entirely clear what is mean by a "gambling consultant" because there is a wide range of different consultants, and many consultancies offer advice that covers gambling fields. What we would be particularly keen to see is advice from people who have knowledge of the gambling market clearly, but also knowledge of excess likelihood to encourage excessive play, knowledge about addition and knowledge about social studies and social research. Q1235 Viscount Falkland: Would you go to GamCare? Mr Harris: GamCare would certainly be someone we would talk to early on. We have a regular relationship with GamCare. If we had a particular case where we had an issue we might well talk to GamCare about who are the best people, and the independent people, to seek further advice from to help us understand what the game is likely to do. Q1236 Viscount Falkland: Have you any documented steps that you have taken in particular cases? Mr Harris: I do not think we have a procedure book of laid down, "This is how we will deal with individual cases". Game licences are relatively infrequent, in the sense that for main games and high risk games, as opposed to games that replicate existing games, we probably deal with a couple of applications a year, and we tend to deal with those as the case progresses and as the issues arise. The issues may fall within problem-gambling; they may fall within other aspects of player protection, such as the nature of the rules of the game or the way the game works or something like that. Q1237 Viscount Falkland: This documentation, would you not agree, would be what most people looking at this objective would expect from the Gambling Commission, if it were in a position to be regulated? Mr Harris: Yes. I am not saying to you I do not believe there is any need for such documentation; certainly it is something we will look at. Q1238 Lord Faulkner of Worcester: Would you agree that it would not be impossible for the regulatory role for the National Lottery Commission to be transferred to the Gambling Commission, as it were, a National Lottery subdivision of that organisation? Ms Black: We still have the conflicts of interest within the Gambling Commission and we have talked about that. Q1239 Lord Faulkner of Worcester: Specifically a regulatory role. Ms Black: We find it very difficult to separate everything out, because everything really does inform everything else, whether it is the granting of licences or amendments to the licences. Compliance work, regulatory work and player protection is all linked in together. Q1240 Lord Brooke of Sutton Mandeville: If the BBC were transferred to Ofcom would you expect the BBC to be regulated by a sub-committee of Ofcom? Ms Black: I have not thought about that at all! Q1241 Chairman: One technical question before I ask you one final question. Have you had any other applications to license games under section 6, other than those from Camelot? Ms Black: We had one a long time ago. Mr Harris: One game was run by Vernons, the Easy Play Game, which was run before the Commission came into being. The technical answer is there is route whereby the Commission can license third parties to operate Lottery games, but that can only be done if those third parties have entered into an agreement with the operator, which is Camelot at present, and Camelot is fully prepared to enter into that agreement. Q1242 Chairman: The point of asking the question is that there has not been a lot of interest so far from other interests in the industry from operating the other kinds of games if you have a multi-licence? Ms Black: We do not know the reasons for that. It may be that they are required to reach an agreement with Camelot first. Mr Harris: There has been a degree of interest. Other organisations have come to us and talked to us in the past but the implication is that the current framework is such that for them to provide Camelot with all the assurances it requires and still deliver good levels of returns to good causes that has dissuaded them from taking those applications forward. Q1243 Chairman: I think the final observation I would make, and respond to it as you wish, is what comes across to us is a sense in which, yes, you do have overriding objections but your main reason to exist is to ensure that money for good causes is maximised through the National Lottery, and the opportunity that Parliament and Government has given for that through the statutory process, and that means the licensing of games. It seems to us there is a clear conflict, and you have accepted this, Chairman, this morning between viewing all this from the point of view of ensuring that the vulnerable are protected, and none of this gives rise to an increase in problem-gambling, and maximising money for good causes through the licensing of these games. If the Gambling Commission have responsibility purely for the regulation in respect of problem-gambling but nothing else and you exist to deal with the rest then the conflict is taken away, both from their organisation and from yours? Ms Black: Forgive me if I have misled you, but I would not accept that we currently have a conflict. We have our clear overriding two duties, which include player protection and variety. It is only when we get past those two that we can start to think about maximising the returns. There is no conflict there. Q1244 Chairman: You have said that the Gambling Commission would have that conflict if all of your role was subsumed into the Gambling Commission? Ms Black: Because the Gambling Commission would have a conflict between maximising returns once it got to that stage - having talked about licensing individual games, on the one hand, the Lottery - and also dealing even-handedly with commercial gambling operators for whom they would not have the duty to maximise returns. Chairman: I am not sure I see there is a difference, but thank you very much for answering our questions. Memorandum submitted by Camelot Examination of Witnesses
Witnesses: Mr Michael Grade, Chairman, Ms Dianne Thompson, Chief Executive and Mr Phil Smith, Commercial Director, Camelot, examined. Q1245 Chairman: May I now welcome our witnesses from Camelot: Michael Grade, Chairman, Dianne Thompson, Chief Executive and Phil Smith, Commercial Director. You are very welcome. We are sorry to have kept you. What are you hoping for from the clauses on the National Lottery that have yet to be published by the Department? Mr Grade: Thank you, Chairman. I think there are two tests that have to be applied to any proposals that affect the future of the National Lottery, and the two tests in respect of the licence simply are: that conditions are conducive to a proper competition for the next licence, and I think that is important; and the second condition is that no undue risk is taken with the returns to good causes. We believe that the multi-operator approach which is being proposed and advocated by the National Lottery Commission fails both these tests quite spectacularly. To hear the Chairman of the National Lottery Commission say that the multi-licence approach is just a bit different, which I think I heard her say ----- Q1246 Chairman: Yes, that was quite clear. Mr Grade: ----- really explains that they do not fully appreciate the impact of the multi-operator approach. De facto a multi-operator approach would leave the NLC, the regulator, in commercial day-to-day operation of the National Lottery - a role for which they were not recruited, they were not intended, and for which clearly no regulator is really suited. That is what we do not want to see from any clauses which appear in relation to the further licence. I hope all our comments through the course of the next moments can be seen in the context of those two crucial tests. Q1247 Chairman: That is very, very clear. We thank you for that. You are quite happy with the thought there would be a proper competition next time? Presumably you want to bid again? If you do bid again and you are successful do you really feel you could raise more money for good causes by being a single operator? Mr Grade: We would hope so. Competition has never been a problem for Camelot. We have won two licences: the first licence in the face of tremendous competition for the very, very first licence; and the second licence in the face of a very, very difficult situation where there was real competition. Competition holds no fears for us. Q1248 Mr Meale: Go back to the multi-operator, you said that competition is not a problem and never has been. What would be wrong with multi-operator licensing? Mr Grade: It is not just us who is opposed to the multi-operator. We have a multi-licence possibility presently under the legislation. It is a multi-operator operation. The People's Lottery and Simon Burridge, whom I think was referred to earlier, said to Mr Kaufman's select committee that he would rather Camelot won in perpetuity the next licence than see the Lottery destroyed by this multi-operator approach. The retailers, who are the lifeblood of the Lottery and sell the tickets that raise the money, are against the multi-operator approach. I am sure that Dianne can take you through the detail. Q1249 Mr Meale: Camelot has not been doing very well lately - 2001/2002 12 per cent down and 2002/2003 30 per cent losses for Lotto Extra. You have not been doing very well at all really, have you? Mr Grade: The problem that we faced was that the main game Lotto, which two or three years ago was more than 80 per cent of our sales, had reached a maturity which happens with a single game. The strategy which Camelot has put in place under Di and Phil and the team has been a portfolio approach, and we need to reduce the reliance on the main Lotto game and increase the portfolio. That portfolio is now growing; that strategy, as you may or may not have seen from our announcements during the week to the press, is working extremely well. The non-Lotto portfolio is growing at around 21 per cent a year. We have taken steps to reduce the decline and that is working, and we are now on path for growth. Ms Thompson: We will start on sales but then I will come back to the multi-licence, if I may. Our sales have been absolutely rock solid since January 2003. Our financial year is fiscal and for the last three quarters we have been doing in excess of £1.1 billion. As my Chairman says, this strategy of building a portfolio is working, and the Lottery here in the UK will be in a far healthier position when Lotto accounts for around 50 per cent of the portfolio rather than the 70 per cent it is doing at the moment. We are in a rock solid position and we launch a very big game next week, and that will give us six or seven weeks in this fiscal year which will take us potentially back into very small growth, but certainly will halt the decline and we will be back in growth in 2004/2005. Q1250 Mr Meale: You are expanding your own portfolio, but what about the expansion of commercial gambling generally? Would you not impede the whole process with what you are trying to achieve on your portfolio? Ms Thompson: Of course the modernisation of the gambling regulations will have some impact on the National Lottery. There are certain areas we have lobbied very hard for in response to the Budd Report. I could quite happily talk about those. If you look at our internet offering, for example, we are competing with commercial operators who are selling games very similar to our Instant Win games; and because we are constrained in that we have to give 28 per cent of the Lottery pound back to good causes, and we have to pay 12 per cent in Lottery duty, the monies that we have got available to give in prize pay-out are far, far less than what some of the commercial operators have available. If I could just answer your previous question, if we are not scared of competition why would we not want multi-licences? There is a huge difference between competing for the market and competing within the market. Q1251 Chairman: This is Mr Burridge's point? Ms Thompson: Absolutely. We think, right and proper, there should be a good competition to win the third licence. We have been through two licence competitions. We have been successful both times. We are not scared of competition. What happened at the end of the first licence was that the original drafters of the licence had not thought through well enough what the transition arrangements would be if the first operator, the incumbent, did not win the second. We had all sorts of incumbency advantages. We did not have to give our terminals away; we did not have to give the retailer database away and so on, and we retained IPR. Q1252 Chairman: Do you mean give them away, or sell them? Ms Thompson: I should say "make them available". We had all sorts of incumbency advantages at the end of the first licence but, of course, the regulator realised that and the drafting of the second licence has removed virtually all of those incumbency advantages. I think the only incumbency advantage that we will have at the end of the second licence is that we will be the only organisation in the UK that has run the UK National Lottery for 141/2 years; but beyond that there will be no incumbency advantage at all. If Sir Richard Branson was prepared to take us on when we had huge incumbency advantages I am sure there will be an awful lot more people who will have a go for the third licence. Q1253 Mr Meale: You accept there is one pot and one pot which is dispersed, albeit probably an expanded pot because of the opening of the market to more gambling opportunities. Do you think it will compromise your business or compromise the amount of money that would be able to be pushed back into good causes? Ms Thompson: With the modernisation of gambling rules? There are certain areas where we did not win all the restrictions we would have liked from Budd. We are worried about bingo - not bingo per se where you have to go out of home to a social venue and are there for an evening's entertainment; but in our bid for the second licence we did have a television bingo game. Once bingo is able to be played on interactive television from the comfort of your own sofa then that will pose a threat to the National Lottery. We are operating in a very competitive market. People say we are a monopoly and, yes, we are a monopoly in the sense that there is only one National Lottery operator; but we operate in a very competitive marketplace and we are fighting for the disposable pound in your pocket alongside magazines, newspapers, Coke, whatever. It is very competitive. Mr Smith: On bingo, anything that allowed bingo to have very large prizes with rollovers, that allowed the prizes to mount to the level where they started to compete with National Lottery prizes, that would clearly have an impact on us. In addition, there are three areas where we still have to see clauses which cause us some concern. One is prize competitions where, unless there is the exercise of a substantial level of skill, what will be created is quasi lotteries, with no responsibility to return to good causes, no limitation on proceeds and uncapped prizes; and we believe that that would create effectively lotteries where the money is not going to good causes, which is contrary to Government policy. The second area where we have concern is in remote gambling, where the proposals we have seen so far do focus on bringing operators within the UK regulation tax regime, which is good but they are silent on what would be done about the very, very, many effectively unlicensed and untaxed offshore operators, many of whom are currently targeting UK players. Many other legislation, most notably the US, have done a lot to try to curb their players and their citizens from accessing these sites. It is unclear to us what would be done here, because clearly these sites offer very, very high prize payouts. Q1254 Chairman: A moment ago when you said you have to pay 28 per cent of the money to good causes and 12 per cent in tax, were you alluding to the fact, for example, that potentially television interactive bingo games could return significantly more than 50-60 per cent to the players in prizes? Ms Thompson: Most of our competitors in this market actually offer far higher prize payouts than we do. Q1255 Chairman: That means the attraction of the National Lottery being to support good causes still has a real value and a real impetus? Mr Smith: Indeed. If you take some of the remote gambling sites at the moment, the internet sites, you can find prize payouts as high as 97 per cent that are advertised. These are UK brand names, albeit operated from offshore. Mr Grade: In that point of distribution to good causes, it is going to be very interesting if the UK wins the Olympic bid and we are then able to rollout. The Olympic Games are going to be very interesting and we are quite optimistic about the public's response to having that transparency when they buy the ticket and they know where the money is going. We think that is going to be a really exciting prospect. Chairman: I think I observed your reaction to the question I put to the Commission about that very issue. We are all excited at the prospect. Q1256 Lord Faulkner of Worcester: Could I ask you to remind us what the split is between expenses and prizes between the various National Lottery products, particularly between scratch cards and the large draw? Mr Smith: The money structure depends on the prize payout of the individual game. For the main Lotto draw the prize payout rate to players is 45 per cent. For some of our scratch cards the prize payout rates are in the mid 60 per cent - it varies on individual scratch cards. On everything we sell there is a 12 per cent duty which goes to the Exchequer, and then the residual from the residual 5 per cent goes to retailers. There is an additional commission that goes to retailers for the expenses they incur when they pay small prizes. From the remaining 5 per cent we pay our own expenses, including the 1.5 per cent which is mandatory for our marketing costs, a minimum marketing spend of 1.5 per cent, and some one per cent in VAT. Our costs are covered from the remaining 2.5 per cent. 1/2 per cent is returned via shareholders in profit. Q1257 Lord Faulkner of Worcester: It would be fair to say that your Lotto players are subsidising your scratch card players? Mr Smith: I would not see it in those terms. Q1258 Lord Faulkner of Worcester: If you are running a charity lottery and your payout to good causes is much higher you might take that view? Mr Smith: Let us take the society lottery point head-on. Our issue with society lotteries is that the minimum statutory requirement to return to good causes is 20 per cent, whereas our average across the piece is 28 per cent, and in addition to which we pay 12p in the pound to the Exchequer. The society lottery scratch cards that we have come up against in the marketplace actually offer more to retailers as their way of getting into the marketplace, and do not offer more to good causes necessarily at all. Q1259 Lord Faulkner of Worcester: The point the Chairman made in the earlier exchanges with the Commission was that most society lotteries pay up to 20 per cent to the designated good cause? Mr Smith: As somebody said, this is a matter of policy. The minimum statutory requirement is 20p in the pound compared to the average 28p in the pound. If it was a minimum 40p or 50p then we would be faced with a very different competitive threat. As things stand, what we see is that that money is largely being channelled towards retailers in order to buy distribution. Q1260 Lord Faulkner of Worcester: Why do you bother with scratch cards at all? Why do not leave that to the society lottery market? Mr Smith: Our scratch card business is enormously successful and a very large business. We will sell over £630 million worth of scratch cards during the course of this financial year. That number is growing quite solidly and it returns a very respectable amount to the good causes and to the Exchequer, so for us it is an important part of the business. Q1261 Chairman: This is part of the mix that was mentioned in respect to Mr Meale's question. Mr Smith: Out of the 30 per cent, which is growing, about half of that is our scratch card business. It has really helped us to offset some of the 4-5 per cent decline we have seen in Lotto. Q1262 Lord Wade of Chorlton: You run a six out of 49 ratio. What is the significance of that as against other options? I believe your competitor works on a different ratio. I would be interested on what is the significance of the ratios in bringing both profit to you and returns to the good causes? Ms Thompson: You are absolutely right that our competitor with the second licence was proposing a six from 53. We launched with six from 49, and our research shows that in fact the vast majority of our players like that six from 49 still, nearly ten years on. It is our tenth anniversary this year. About 60 per cent of our players play the same numbers they have played from day one and do not want to see a change, but we do research it from time to time. In terms of profit, I think it is important to get Camelot profit into context. For every pound in profit that we make, retailers are making £10 of profit; the Government is getting £26 back to the Exchequer; good causes are getting £56 back; and our players are getting £100. Our profit is absolutely minute. I would argue, however, that the profit motive, and one of the things that Mr Burridge did say which did not come our quite clearly in his earlier evidence session today [sic], he was not saying they would not bid under the status quo; what he was saying was he believes it should be a not-for-profit lottery. I disagree with that. I would do, would I not, because I run a for-profit lottery; but I believe it is the profit motive, despite the fact we only make 1/2 per cent profit, which has kept this organisation lean and mean and made us the most efficient lottery in the world for four out of the last five years. If you look at the operating costs in Europe, the average operating costs for European lotteries is 14 per cent, ours is actually 4.8 per cent including profit. If you look at the stage-run organisation in Belgian theirs is 23 per cent. The profit motive, I think, has delivered the most efficient lottery in the world. Q1263 Lord Wade of Chorlton: Not-for-profit, but that does not mean they do not take all their expenses out of it, does it? Nevertheless, at the end of the day I agree with your point. Ms Thompson: It is very difficult to define what "not-for-profit" is. The other point is, which the Chairman of the NLC made this morning, under the new regime that they have, they have the ability to fine us if we do not actually comply with certain areas of the licence; and we have had a couple of very small fines. If you are not-for-profit you never face fines. The only pot of money is the good cause pot. Q1264 Chairman: Or the money that goes to the Exchequer? Is this 12 per cent tax too high? Ms Thompson: We think so! Mr Smith: It is not a question of the level for us; we think it is a question of the method of application. We think that the application of a sales tax is not in the best interest of the National Lottery when it comes to the maximisation of returns for good causes, because the first beneficiary of any extra sale that you make as a result of increasing prize payout is actually the Exchequer, and not necessarily the National Lottery distribution fund. We are in the middle of discussions now where we would like to be in a position where we could move to a gross profit tax regime in line with the rest of the industry, albeit we would be happy to pay at the levels which we currently pay. Q1265 Chairman: Given that you say your profits are fairly small, but moving to a gross profit tax would presumably mean a combination of more money for good causes and more money back in returns to the players to deal with some of the concerns you have raised? Mr Grade: At least neutral for the Treasury, yes. We believe that the ability to increase the prize payout would increase sales, and there would be a virtuous circle. Q1266 Chairman: Like many members of this Committee, Mr Grade, you enjoy a visit to a racecourse from time to time. You will have observed that the abolition of the off-course tax resulted in a substantial increase in betting shop turnover. Do you have a similar feeling if this were addressed that there would be an increase in ticket purchases? Mr Grade: We are in no doubt about that. Mr Smith: We believe certainly with some games and with some styles of play, for example on the internet, there would be substantial increases in sales as a result of the application of a gross profit tax, which would result in increased returns to good causes as well as an increase in returns to the Exchequer. We have had an independent study commissioned by us from the Henley Centre, which suggested that as much as £500 million could be the additional pot to be shared between the relevant parties during the course of this licence. Mr Grade: I think historically, as I understand it, the Lottery duty was designed to compensate the Treasury for a lowering of receipts it would get from the Pools as a result of the introduction of the Lottery. I think it is fair to say everyone I have spoken to at the Treasury suggests that the receipts were far in excess of anything they expected. Q1267 Baroness Golding: How effective do you think changes to the licensing process will be in ensuring effective competition for future licences? Mr Grade: Quite the contrary, we believe that the evidence that is beginning to emerge in the responses from other interested parties (not just Camelot) to the multi-operator approach suggest that the only support for this idea lies within the NLC, and we think it is an idea that has not been thought through. We think it leaves a much greater degree of discretion to the regulator than Parliament has ever offered before. It is an idea that simply will not work. It will fall apart in the execution. It is a very, very high risk strategy for Parliament, in my view, to effect something that everyone is convinced will not work to the discretion of the regulator, and ultimately have the effect of making the regulator the de facto operator of the Lottery because of the conflicts it will set up between the operators. It is an absolutely disastrous idea. Q1268 Jeff Ennis: How do you think it should be regulated? Mr Grade: The single model has operated efficiently and effectively. It has always produced competition in the past, as Dianne has explained. The incumbency advantages have always been removed in the second licence to smooth the transition from the second licence to the third licence. By far the most attractive proposition for people getting interested in bidding for the National Lottery is the single operator option. Q1269 Jeff Ennis: Do you think that the National Lottery is the most appropriate? Mr Grade: I think it will depend entirely on what the shape of the third licence is likely to be through the process of this Committee and so on, and when we see the clauses and when we see the ultimate Bill. If we are going to be stuck with this multi-operator approach I have to say I do not think either the Gaming Commission or the NLC is the appropriate body to regulate and be the de facto operators of the Lottery. I think it is going to take a very, very serious re-examination if you are going to go the multi-operator approach. If you stick with the single operator approach by and large, after many, many debates internally at Camelot, we see no reason not to have the NLC; but at the end of the day we will live with whatever Parliament decides is the most efficient and effective way to maintain returns to good causes in the future. Q1270 Jeff Ennis: Could I ask a supplementary to an earlier question from Lord Wade that betting companies are not allowed to take bets on the National Lottery, but they do take bets on the Irish Lottery I was just wondering what amount of seepage we had from the good causes because of the fact that bookmakers can take bets on the Irish Lottery? Ms Thompson: I am not sure we can answer what the total impact on the UK Lottery is. What I can tell you is that side-bets being taken on the Irish Lottery caused the Irish Lottery sales to fall by 20 per cent; which is one of the reasons why we fought so hard to try to prevent side-betting with the UK National Lottery. It is difficult to tell how much the Irish side-betting has actually impacted; I am sure it is impacting some. To be frank, if you look at our player base - and no doubt we will get on to the areas of excess play and all those sorts of things in a moment - 70 per cent of our players actually do not bet on anything else, not even a flutter on the Grand National, and they would be mortified to think of themselves as gamblers; they see it as a harmless flutter and the standard quote is that "It is a pound to dream". It is that 30 per cent of our market where the competitive environment we are in is actually impacting the National Lottery and is very difficult to quantify. Mr Smith: As part of the submission in response to the Budd Report we commissioned reports from PricewaterhouseCoopers and from the Henley Centre. On the issue of side- betting both of them independently estimate that the loss to good causes would be of the order of magnitude of some £400 million during the course of the licence. Q1271 Jeff Ennis: Do you think there is a case to be made to abandon all side-betting on all lotteries in this country? Mr Grade: I do not think we want to interfere with something that is popular with a certain part of the public. It is an established form of betting for people who like a particular niche gamble. I do not think we should be in the business of arguing against something that is not materially affecting returns to good causes. Q1272 Lord Brooke of Sutton Mandeville: Is my recollection correct that the last National Lottery in this country, before the present one, came to an end in 1826 because of corruption in the secondary market rather than the primary market? Mr Grade: I think that is correct! Q1273 Lord Donoughue of Ashton: You said that if Parliament and the Government decide that the Lottery Commission continues as the Regulator you can live with that, could you equally live with it if it decided that the new Gambling Commission should be the Regulator?Error! Bookmark not defined. Mr Grade: Yes, we would have to. Q1274 Lord Donoughue of Ashton: I know you have to but do you have any preference between those two? Mr Grade: If we are talking about a single operator I think we would prefer to leave things as they are. However, what we would like to see is perhaps the Chairman of the NLC sitting ex officio on the new Gaming Commission just to be present and to argue the case where there is conflict between non‑Lottery and the other gaming products. It is very, very important that if we do have separate regulators that the interests of the good causes are properly represented in a way that is defined by statute in the Gaming Commission. Lord Donoughue of Ashton: Thank you. Q1275 Chairman: How would you feel if the Gambling Commission assumed responsibility for the social responsibility issues and the National Lottery Commission carried on doing everything else? Mr Grade: We would have to work with it. Q1276 Chairman: It would get round this conflict, would it not? Mr Grade: I am not sure that it would, Chairman, I am not entirely certain that it would. I am not sure that as a principle any single organisation facing two regulators, where inevitably there is some blurring of the boundary between responsibility, would. It is difficult enough having to deal with a single regulator who only has one client in Camelot - correctly so for the right reasons - to ensure that when the Lottery was established it was terribly important that Parliament recognised that the probity and the integrity of the Lottery was paramount and the single regulatory structure of the NLC has carried that duty out with tremendous success and are to be applauded for that. Anything that blurs the lines between competing regulators regulating one business could be a recipe for conflict. Q1277 Mr Meale: Going back to the answer you gave to my colleague Jeff Ennis that you were not really concerned with interference with Eire, the Irish Republic, and their Lottery, surely it is not the same case with other lotteries that land on people's doorsteps or are advertised elsewhere in this country where there are a lot of people being mislead on things like false lotteries from Canada and lotteries from South Africa and Spain, and so on. Are you maintaining your strict opposition of such measures? Mr Grade: Absolutely. There is a tremendous amount of marketing and expertise which goes behind the public's general trust in the National Lottery, and that has to be preserved, and we would want to distance ourselves by any means possible from those who wish to exploit the vulnerable with shady products. Q1278 Mr Meale: In terms of your approach towards the Irish Lottery is that not the same, is that not the start of a process which may then worsen? Mr Grade: If it is going to be a growing problem and is going to materially dilute the returns to good causes then obviously we would make representations through our Regulator to Parliament to say this is what is happening, are you prepared to live with the consequences of this or do you wish to stop it? At the moment we would not want to be in a position of standing in the way of competition where it does not materially affect the return to good causes. Q1279 Baroness Golding: On that subject, I have asked a number of times for evidence on the effects of side betting on the National Lottery, at least three times, and I have been promised it three times and I have never had it. I wonder if at some point it could be sent to us? Ms Thompson: I do apologise. We will make sure that you get that. Mr Grade: Whatever we have you will have. Q1280 Chairman: Before we move on to the social responsibility issue can I just ask you this, you have made it very clear that you do not think that a multi‑licence approach will work, have you taken advice or done any research on the impact that this would have to support your judgment? Mr Grade: When this idea was floated the board of Camelot commissioned an independent economic research group, Frontier Economics, with a brief to examine the consequences for good causes and for the licence process of this proposal. I am not sure whether we have formally or informally furnished this Committee with the Report but we will make sure that you receive copies of that Frontier Report. They are basically saying a number of things, the first of which is that competition within the market will in the end dilute and diminish the returns of good causes because you will have a situation where competing operators have no incentive to grow the market, all they want to do is steal the other operators business, it is as simple as that. There are obviously other things that flow from that but that is their main conclusion. We believe not just from our own internal experience but from listening to other interested parties, not least the retailers who have a crucial say in the growth and success of the National Lottery, potential competitors, and those who have spoken publicly have said this is an idea that will not work, they would have no interest in bidding for it. What the NLC does not seem to appreciate is that these are businesses that will show any decent kind of return on a stand‑alone basis. Economies of scale are achieved in marketing spend. I have heard Di say quite often we spend a minimum of £75 million a year marketing the National Lottery brand. I am sure that multiple operators would be required to spend their share of that £75 million but when you actually go and spend £75 million as one customer you get a tremendous volume of discount, and that £75 million is worth an awful lot more than three individual people going out and spending £25 million, £25 million and £25 million, that is just one example. The most damaging arguments against this multi-operator approach ‑ it is not a multi‑licence approach it is a multi‑operator approach ‑ is that there are very limited software and marketing windows from which to launch new products. In the modernised, de‑regulated gambling world you have to be nimble and quick with new products and some products do not work. The idea of being locked into a dispute procedure with other operators who are fighting for the limited opportunities to launch new products and while the regulator sits down and sorts out which is the right one - there are three operators competing for one software window to get a new product - you will miss the market. They will have to make commercial judgments, it is highly subjective, it is entirely subjective. They are regulators they are not commercial operators. Ms Thompson: If I can add to that, there are only two markets in the world where there is a multi‑operator structure currently, one is Italy where the two operators have been in legal wrangling for some years, the second is Spain. There are three operators in Spain, it is quite a different structure from what is being proposed here. In Spain you have an operator for the Catalan Lottery, which is a very discrete area with its own characteristics. Then there is a national lottery operator which is very similar to ours, they report to the Ministry of Finance, it is not a private organisation. Then there is a lottery for the blind, sold by the blind, a very specific lottery, and its purpose is very clear. Nowhere else in the world has the model which is being purported here worked. Quite the reverse, what is happening is people from South Africa came to the United Kingdom and they built the South African Lottery on the British model. Chairman: Thank you very much. Q1281 Lord Faulkner of Worcester: How many of your players would you regard as problem-gamblers? Ms Thompson: Less than 1%. Actually finding people who admit to being a problem gambler is difficult, as you probably now, we part fund GamCare, 0.7 of our fund which goes to GamCare are to do with the National Lottery product. Most of the research shows that if people have a problem with a National Lottery product they often have a problem with slot machines, horse racing or whatever. We do take social responsibility very seriously and there are three areas that we are particularly concerned with, the under 16s, those on low income and those with addictive tendencies. The National Lottery Commission discussed earlier this research protocol which was developed called the Game Design Protocol, which is something we are very proud of. We are the only lottery in the world that has something similar. It is a very difficult piece of work to do because it is against the Market Research Society's ruling for research to be carried out on under 16s. To be able to do work with under 16s to find out what triggers and motivates them and might cause them to play some of our games we had to get special dispensation, which took us the best part of 18 months, we did get it and we did a lot of research with under 16s, a lot of research with people on lower incomes, who are far easier to find, and research with people with addictive tendencies, which again are not difficult to find. We benchmarked a whole variety of games and opportunities to play in the industry itself, not only our own particular games, and got some benchmarks and found what type of games were more appealing to those three vulnerable groups and then we benchmarked our own games against those three. Any time we launch a game now that is outside the norm of what we do it would go across that the Game Design Protocol. For example we recently launched a Lord of the Rings scratch card and it was launched in December to tie in with the third of the trilogy being launched at the cinema. Quite rightly the NLC would ask is that more likely to appeal to children than any of our other games and that went through the Game Design Protocol and it did not. We take it very, very seriously. Q1282 Lord Faulkner of Worcester: Do you do find there are more problems with some games more than others? Ms Thompson: Invariably. A Lottery draw on a Wednesday or Saturday, as the NLC were saying, is perhaps less appealing to a younger audience than something that is a scratch card, that is easily available, they know they can get it when they are buying petrol. Mr Smith: The purpose of the Game Design Protocol is to allow us to screen those out and modify them before they enter the market, we would change the price structure or the pricing if that was going to be a problem. Q1283 Lord Faulkner of Worcester: You heard the exchange earlier about the possibility of raising the age limit from 16 to 18, do you have view on that? Ms Thompson: It is a matter of record that on a couple of occasions we have said to the department that we in fact would not oppose a change to 18. The NLC could not quite quantify that for you but in fact the work we have done would indicate it would be a loss of about £20 million a year on scratch cards. Mr Grade: Out of £4.5 billion turnover. Mr Smith: It is £4.5 billion in total but 630 on scratch cards. Q1284 Lord Faulkner of Worcester: One of the reasons for that is because social problems will be easier to deal with if gambling starts later. Ms Thompson: The prevalence study shows that people at 14 and 15 are more vulnerable than people of 17 and 18 and therefore invariably in any age control product there are bound to be some children who get through the net. The dangers at 16 and 17 are less than those at 13 and 14. We would not have a problem per se but the people who probably would have a problem would be our retailers because at the moment the ruling is that nobody can actually buy a ticket or sell a ticket if they are under 16. If that went to 18 then for a lot of retailers who employ Saturday staff who are school kids of 16 and 17 that could be a major issue for them. Q1285 Lord Faulkner of Worcester: They are not allowed to sell cigarettes under 18, are they? Ms Thompson: To be frank I do not know, I do not think so. Q1286 Chairman: Alcohol is 18, cigarettes are 16. Mr Grade: The marketing strategy at Camelot is essentially aimed at 18 and over. The tone of our advertising, and so on, is designed specifically for 18 and over. Q1287 Chairman: There is always the danger that the older kids can buy tickets for the younger ones, but that applies to everything. Ms Thompson: Or a parent. We have done a massive amount of research every year and we found that one of the potential areas of problems that we had was parents buying tickets to give to underage children. We did a parental awareness campaign two years ago to try and make parents realise they should not be doing that. It is very difficult to stop that. Mr Smith: What we did is Operation Child test visits, where we perform 10,000 visits a year, which is double the amount which is required by the NLC, where we send people in who look as though they are under 16 in order to test the retailer's vigilance. We operate a three strikes and you are out policy, if a retailer sells on three separate occasions to somebody who looks as though they are under 16 we will cancel their contract, which we have had to do some eight times in the last four years. Chairman: Thank you. Q1288 Mr Meale: Mr Grade, you heard a little earlier from the Chairman of NLC about a belief that they thought an operator should contribute to the industry's charitable trust. I know in particular that your body was deeply involved in the establishment of that trust and yet you say you feel it is inappropriate for you to sign up to it, can you tell me if that is the case now and whether you intend to change that in the future? Mr Grade: We are very happy to put the record straight, we have reached agreement and we are contributors. Q1289 Mr Meale: We are very grateful to hear that. We did find it strange that as your Chief Executive was saying you spend masses of money every year, year‑on‑year, on research and yet you did not sign up to it, which we thought was a case of, "not me, gov". We are pleased to hear that. Ms Thompson: If I can add to that, the original strategy, as we understood it, of what was then the Gambling Industry Trust was to look at a cure and treatment for problem gamblers. We do not create very many problem gamblers at the National Lottery, we are at the very bottom end of the game in that the prize return is far lower. We spend a lot of money on prevention and we have worked very hard with GamCare, our game designs are discussed with GamCare, we do a project called Operation Child Underage and we do the Game Design Protocol. We work really hard to stop National Lottery products becoming a problem and we thought the emphasis on treatment rather than prevention was not right for us. We do spend about £2 million a year on a preventive strategy. The strategy, as we understand it now, has widened, I cannot remember what it is now called. Q1290 Chairman: Responsibility in Gambling Trust. Ms Thompson: The remit has widened and now it is looking at prevention as well as treatment. Q1291 Mr Meale: Is one of the reasons why you reversed your decision to participate because there are lots of industries which are connected with things which are connected with addiction, the whiskey industry for instance spend a lot of money on both sides of that problem area, prevention and addiction itself and they feel it is right to invest in both sides and to do so independently of their own research data. As I say, everyone is pleased you have taken the right decision. Ms Thompson: Thank you. Q1292 Lord Faulkner of Worcester: You will have heard the exchanges with the Commission on the Rowntree Foundation statement about scratch cards being comparable to gaming machines, those offering the potential for instant gratification and indeed leading to problem-gambling in children. The Commission rather surprisingly said they had no view, I wonder whether I can ask you for your view on that and using the definition of problem-gambling as something that is habit‑forming and going to lead to addiction and whether you think it is appropriate that under 18 year olds should be permitted to buy scratch cards? Mr Smith: We clearly have a view, for us prevention is key. As was said earlier we do regular studies to ensure that these games do not appeal to the under 16s. When we have looked at scratch cards ‑ and our research shows that scratch cards do not get into problem gambling amongst the under 16s ‑ we have policies on marketing to ensure that even though the age limit is 16 we make sure that we target the over 18s in order to steer clear from that danger area which my Chief Executive was talking about, the 14 and 15 year olds. We do work closely with GamCare to look at the individual games that are being brought forward. For the first time when we have introduced our £5 scratch card recently we printed GamCare's details on the back of the ticket. Mr Grade: There are countries in the world that do not share and have not shared Parliament's view of the need to regulate quite as effectively and as prohibitively, and I do not mean that pejoratively. Take Australia, for example, where there is a much more liberal environment, they are beginning to realise just the havoc that has been reeked with machines, and so on, and lottery products that (a) we would not wish to the market in the United Kingdom and (b) we would not be allowed to. One needs to be very, very vigilant, Parliament needs to continue and the Regulator needs to continue to have that brief from Parliament. For the level of spend in the United Kingdom on National Lottery products we are forty‑seventh per capita spend, we think that is good thing. I think the NLC would share that view, they sort of did this morning. We think that is a good thing. We gain the returns that we do, the 15 billion which we have raised for good causes, through volume, the number of people that buy the tickets rather than a few people buying a lot of tickets. Mr Smith: 70% of the population buy less than four times a year. Q1293 Lord Donoughue of Ashton: Just approaching the last question, could I just comment that on a couple of occasions this morning and Ms Thompson recently pointed to an addiction risk of round 1% and it being at the soft end of gambling. Our medical advisers pointed out that a number of very major diseases have a risk rate of about 1%, I think prostrate is one, and I do not think you should be addressing this Committee relegating that to a matter of low importance. More specifically, can you update the Committee on Operation Child, do you think this initiative provides a useful model for the Gambling Commission? Ms Thompson: Operation Child has been running since 1999. Basically we are in that sort of slightly bizarre situation where the only people concerned with underage purchasers are trading standards. Trading standards do not receive a budget for testing on National Lottery products, although a few trading standards authorities will do so but the vast majority do not. It would be illegal for Camelot to send under 16s in so we have this rather bizarre situation where we recruit over 16s actors and actresses and send them into stores. Obviously if the retailer sells to an over 16 person he is not breaking the law but what he is not doing for somebody who looks under 16 is he is not paying due diligence and asking the questions he should be asking for proof of identity. We committed in the second licence that we would do 5,000 visits a year, we actually do 10,000 visits a year. As my colleague said earlier it is a three strike and you are out policy. The rough number are about 85% of retailers do not sell at all on the first visit. The 15% who do sell know because we will send somebody back in to say, "do you realise you have done this, this person looks under 16 and you should have said, 'can I have proof of identity?'" Then will then know they will get a second visit some time within the next two months but they have no idea when we will go back. The 15% who get revisited we have somewhere in the order of about 5% who sell a second time. Lord Brooke of Sutton Mandeville: Is that 5% of 15% or 5% of 100? Q1294 Chairman: Five of 15. Ms Thompson: We then go back to those people for a third visit and as my colleague said we have had eight in the four years that this system has been running who have actually sold a third time. The ultimate penalty is they lose their terminals which for a small independent - and the average Lottery retailer gets about £8,000 commission a year - that can be its lifeline. I am sure I have probably had letters from some people round this table saying, "my retailer has lost his terminal". That is what we have to do. For us it works very well. Q1295 Lord Donoughue of Ashton: That is quite impressive. Do you ever feel that you are doing the regulatory role that the Lottery Commission might be expected to do? Mr Grade: I do not think so. I think on these issues the NLC and ourselves are at one on this issue. It works very well. We know what our responsibilities are and we know what our licence conditions are and they know what their statutory responsibilities are, the two things work well together. One could wish that a lot of the subjectivity one heard this morning was removed from the process, there is an awful lot of subjectivity, guessing as to what might happen when the product goes on the market, one could perhaps wish for a little bit more of regulation. You launch a product ,obviously going through the gaming protocol and all of the procedures of gaming launches, and then the Commission takes a view as to what is happening in the market and instructs us to remove the game or we remove it ourselves if it is having an unanticipated effect. On the other hand it could go the other way, it could be a very successful game that is pure and clean in terms of social responsibility and earning terrific returns for good causes. There is a large degree of subjectivity in the regulatory process. Q1296 Chairman: You did not quite answer the second half of Lord Donoughue's question about whether your Operation Child initiative might be something that the Gambling Commission could take up and apply more generally? Ms Thompson: We are very happy to share our learning. As we said earlier when the Gambling Industry Trust was first formed we did do a lot of help there in terms of sharing with them. It is a very expensive, onerous project. As you can imagine 10,000 retailer visits is itself a lot but having to find a sufficient number of actors and actresses so that retailers do not get used to seeing the same faces is also very difficult. We have had to increase our staff number by four just to run this project per se. Mr Smith: It is rather specific to our unique benefit distribution which is through normal retail channels in so far as most of the other players in this market are within a contained environment it may not have as much application. Chairman: This conversation has sparked off a lot of enquiries. Q1297 Baroness Golding: This is more an observation, Camelot also sits on the Board of Citizens Card, which is a proof of age card which is used by many newsagents, there are at least 600,000 of those already issued in the country - I happen to be Chairman of it so I know - and it has been very useful to have Camelot on board because that has been one of the concern of newsagents, obviously from the research you have done it looks as though it is working. Ms Thompson: It is, thank you. Q1298 Lord Brooke of Sutton Mandeville: To avoid any misunderstanding in terms of the earlier question I asked, when you say 5% or 15% of the second visit passed the examination did you mean one third of those? Mr Smith: I think it is 5% of 100! Q1299 Mr Page: Camelot is right on the edge of my constituency so I have been fairly careful not to ask you any nasty questions. Ms Thompson: You saved it for the last! Q1300 Mr Page: I am a professional coward, you will be aware of the excitement that affected our post-offices with the automatic transfer of pensions into bank accounts, and the loss of foot‑fall into those post offices, have you done any calculation of how much foot‑fall comes in to your independent retailers through the sale of the Lottery? Mr Smith: Yes, we have done a number of research studies that looks at the foot‑fall associated with Lottery products and also looks at the products that are bought as a result of that visit. I am quoting from memory here, I think in some cases we were seeing increases of as much as 15% as a result of a Lottery terminal being in a store. Mr Grade: If we may we will furnish the Committee as soon as possible with confirmation of any information we have in that regard. Ms Thompson: Could I just add to that, you are asking specifically about post offices ‑‑‑ Q1301 Mr Page: I used that as an example. Ms Thompson: What we have been doing is working with the retailers at the bottom end in terms of their sales to try and help them improve their sales. You may possibly be referring to some speculation about retailers losing their terminals. What we have done, and particularly in rural post offices, who tend to fall into this category, is we have ring‑fenced 1,000 what we call community terminals, which are terminals to be absolutely frank which do not warrant being in the retail outlets, they do not warrant the expense of servicing those outlets through telesales or reps calling, etc. We believe those terminals are providing a service to the local community and if we moved those terminals it would have a major impact not only on the retailer but also our players because they would not be within a two mile catchment area. We do look at it very seriously, for a lot of our retailers this was their lifeline. Q1302 Mr Page: That is very helpful. My last question, and I have gone through the houses, do you feel any of your retailers should give any form of contribution to the Responsibility in Gambling Trust? Mr Grade: I would not have thought so. I think the independents have quite a struggle to compete today with the out-of-town, edge-of-town superstores, and so on. Chairman: Some of those sell your tickets! Q1303 Mr Page: My heart is bleeding, if they just give £10 or £20 over a period it would be a substantial amount to help this Trust? Mr Grade: Yes, it would, if they can afford it. Q1304 Mr Page: If they cannot afford that sort of money they are going to go bankrupt. Mr Smith: The margin we offer retailers at 5% is fixed across the trade and that compares quite poorly with margins they receive on other products in their stores. We have continuing commercial negotiations with all of our retailers about the size of that margin. As the National Lottery is so important to them we are able to hold that line further in position. Mr Page: That is why I asked about the foot‑fall. Q1305 Chairman: Can you send us formally a copy of the Frontier Research Report that you mentioned? Mr Grade: Indeed, Chairman. Chairman: Chairman: Can I thank you all very much for coming today and for answering all of our questions so succinctly. |