Select Committee on Culture, Media and Sport Memoranda


Memorandum submitted by Betfair

  We are writing to present Betfair's submission to the inquiry by the Culture, Media and Sport Committee into the proposed changes to gambling legislation, "A Safe Bet For Success", the Government's own response to the Gambling Review Report, chaired by Sir Alan Budd ("the Budd Report").

  We appreciate that the regulation of betting exchange operations (or betting brokers" as they are sometimes referred to) is not top of the agenda for the inquiry but it is an activity which (i) is having a dramatic impact on the industry, (ii) was highlighted in the Budd Report as being an area in respect of which the current legislation and regulation is currently inadequate, and (iii) is constantly the subject of ill-informed allegations of illegality and impropriety. Betfair leads the betting exchange industry in taking measures which eradicate any concerns which might be raised. We intend to work closely with the DCMS to establish such measures as the industry standards so that UK regulated betting exchanges can be recognised not only as a tremendous innovation for the benefit of the punter but also as bastions in the struggle to preserve the integrity of the industry. This letter intends to provide you with an introduction to our proposals.


  Betfair is the world's largest sports betting exchange, with an annualised betting turnover of over 1.2 billion after only two years in operation. The company holds a UK bookmaker's licence and is registered with HM Customs & Excise for the payment of Gross Profits Tax. We currently employ 75 people and our head office, and all of our operations, are located in South West London.

  Betfair is one of the most successful British companies of the last two years in any sphere:

    — launched in June 2000;

    —  Created the concept of the "betting exchange" and established a product which has spawned copies (numbering well into double figures) all over the world;

    —  Has achieved a compound monthly growth rate of 25 per cent since its launch;

    —  Now turns over an annualised 1.2 billion of bets;

    —  Profitable in its second year of trading;

    —  Now one of the three largest on-line betting companies in the UK by turnover; and

    —  Currently employs 75 people, expected to grow to over 100 people by year end.

  While we support the Government's response to the Budd Report, we are aware that various members of the betting industry (usually with their own obvious agendas) have tried to raise concerns about the activity of betting exchanges and are lobbying for the introduction of legislation which will prohibit or seriously restrict such activities. It is important to us, as one of the most significant players within the industry, that we are able to address these concerns and ensure that betting exchanges are properly regulated and recognised as entirely legitimate.


  It is the Government's stated objective that they wish to see "a successful British gambling industry; one that is able to respond rapidly and effectively to technological and customer-led developments in both the domestic and global market place, building on its existing reputation for quality and integrity, and in the process increasing its already important contribution to the UK economy".

  Betting exchanges are the most exciting development in the betting industry in recent memory, and are arguably the most successful product ever introduced within it. They are only possible due to the existence of a network technology like the internet. Unlike the traditional bookmaker model where a punter can only back an outcome, and then only at the prices specified to him by a small range of bookmakers, betting exchanges allow the punter to ask for his own price and to take a view on both sides of the market. Punters do not bet with the bookmaker, rather they bet directly with other punters. Betting exchanges provide the punter with an unrivalled amount of choice and put him in charge of the betting process, as the punters themselves create both demand and supply. They are the perfect example of a product that is both technological and customer led and will become a genuinely global product in a very short period of time.

  Betting exchanges are based around software that was developed by Betfair and is subject to a UK patent application. At the core of this software lies the protection of the punter and the maintenance of total integrity on the exchange. Furthermore, the choice which is inherent in a betting exchange guarantees better value for the punter. The phenomenal success enjoyed by Betfair and others in the last 18 months is testament to the appeal of the product to the betting population.

  As sport is a global industry so betting will naturally become one also and betting exchanges are better placed to exploit that potential than any other form of betting.

  As the clear industry leader, Betfair therefore believes that it stands at the cutting edge of precisely what the Government considers a key driver of its gambling policy.


  Since before its launch, Betfair has had a proactive relationship with Government and has been open about its objectives and its means of achieving them. When Betfair was launched in June 2000, the company took a conscious decision to base the business onshore, rather than following the trend of the day and moving it offshore.

  Notwithstanding some recent allegations made about the company by competitors, Betfair:

    —  pays Gross Profits Tax in the same way as traditional bookmakers. To date since its introduction, the company has paid a total of 215,000 in GPT

    —  contributes to the funding of horseracing through contributions under the 41st Levy Scheme

    —  has reached agreement with the BHB and other sports bodies (BGRB, football leagues etc) over data rights payments

    —  was actively involved in discussions with Customs & Excise regarding the appropriate treatment for betting exchanges under the GPT regime, and consequently played a role in the October 6 2001 implementation of GPT


  Betfair believes that there should be specific regulation of the betting exchange industry. We recognise that integrity is the single most important factor to be considered and, as such, the company already does many things voluntarily. Specifically we:

    —  segregate client money accounts from the company's own finances so that all client monies are always 100 per cent secure

    —  reconcile the client accounts monthly to ensure that there is always complete transparency within them

    —  undertake money laundering procedures such as refusing to accept cash and monitoring betting activity for any suspicious transfers between account

    —  continually monitor all transactions that take place on the exchange to ensure that any improper activity, whether it be betting related or not, can quickly be identified and prevented

    —  maintain records of every transaction ever undertaken on the exchange for an indefinite period of time (this includes voice recordings of any transactions completed over the telephone) such that we can always provide a complete audit trail of any transaction

    —  do not permit any of our employees to bet on the exchange while at work

  Betfair believes that regulation should seek to keep gambling free of crime and ensure full protection for the punter. The company has already developed an excellent relationship with all of the relevant authorities (including the DCMS, HMC&E, the BHB, the Jockey Club and the BGRB), and will continue to drive to ensure that betting exchanges are not a platform for corrupt practices.

  Unlike a traditional bookmaker, Betfair never has a position on its own book. It only ever acts as a broker and there is, therefore, never a "bad" result for Betfair. As a result, Betfair always takes a completely objective view of all betting transactions on the exchange. In addition, as Betfair never takes a position itself, there is never any chance of it not being able to pay out punters—all bets placed on the exchange are covered with cash to their maximum liability (punters are required to download funds into a Betfair-held account to ensure any bet placed by them is wholly cash collateralised). This provides the ultimate protection for the punter and is unlike the position of a traditional bookmaker who will frequently expose himself to an unbalanced book and could, therefore, be forced out of business by a particular result.

  We believe that Betfair's current "code of practice" should form the basis of any future regulation as it will guarantee a high standard of integrity, service and protection for the punter.


  It has been suggested by opponents to Betfair's platform that the software allows people to bet against an outcome that they can then affect. Recently, Lord Burnham raised this point in the House of Lords (5 March 2002). This allegation is most commonly made in reference to horseracing. However, we strongly disagree with it, regardless of the sport in question.

  Betfair has communicated and met with the Jockey Club on several occasions, and believes that the Jockey Club is satisfied, having seen the extent of Betfair's auditing and the self-imposed rules under which it operates, that, far from being a threat to the integrity of the sport, the betting exchange, properly run and properly regulated, can actually help the sport maintain its integrity.

  Most recently, Betfair was instrumental in aiding the Jockey Club investigate an issue involving doping allegations at Plumpton. Betfair maintains an extensive audit trail on every transaction on its system, and shared significant detail of the bets placed on the race in question with the security department of the Jockey Club. The result was that the Jockey Club were able to conclude categorically that there were no suspicious betting transactions on the race. This moved one national newspaper to comment:

  "Time may show that betting exchanges are not only the best thing to happen to punters in decades but they could prove an invaluable weapon in the Jockey Club's battle against the few who try to corrupt the sport".

  (Daily Telegraph, 6 May 2002)


Additionally, it has been suggested by opponents that Betfair creates a vehicle for illegal bookmaking.

  We strongly refute that this is the case. Margins are so tight on a betting exchange that it is simply not possible to make a book: pricing entirely precludes the kind of overrounds bookmakers require to make a profit. The average price on horseracing favourites on Betfair is 20 per cent better than the average price at a bookmaker, making it hard for someone to run a bookmaking business efficiently on Betfair but, at the same time, providing outstanding value for the punter.

  We also refute entirely the claim that bookmakers are simply giving up their businesses, revoking their licences, moving on to the exchanges, and not paying tax. In addition to the point above concerning margins it must be noted that Betfair is paying GPT anyway and thus every bet that is placed through the exchange attracts GPT.


  Opponents of Betfair have also suggested that the on-course market will be weakened by the growth of betting exchanges and this point, too, was raised by Lord Burnham. We actually believe that the on-course market will be strengthened by the advent of betting exchanges.

  Betfair regularly accepts bets from bookmakers who are present on-course and who are looking to hedge their positions. Indeed, on several occasions, the ability of the bookmaker to lay off his position off the course has enabled him to take further bets on the course without having to radically reduce his price. This can only be good for the on-course market and effectively makes the depth of the entire betting market available to punters on the course.


  There have been some suggestions from major bookmaking companies that the British Government should outlaw betting exchange, on the basis that they may damage the integrity of racing. We believe that these calls are motivated purely by the competitive threat that betting exchanges pose to the traditional bookmaker.

  Betfair strongly disputes any suggestion that betting exchanges, if administered in line with the rigorous checks the company imposes on itself, are any threat to the integrity of any sport. On the contrary, we are convinced, in line with many commentators, that the audit trail we maintain strengthens the hand of administrators in their fight against criminals.

  However, that argument aside, it is important to recognise that the betting exchange concept is now here to stay. It is already so prevalent that it is easy to forget that before Betfair created it, it did not exist. It is clear that to outlaw exchanges in this country would simply see the creation of exchanges off-shore, where regulation would obviously be impossible, and where the UK economy would fail to benefit from the tax revenues and employment opportunities that an on-shore company provides.

  With integrity so crucial to exchanges, it is fitting that a British company whose government has the objectives stated above should be leading the way. It is important that moving forwards, the world of betting exchanges continues to be led as it is now: by on-shore, fully accountable organisations with a proven track record for co-operation with all relevant regulatory authorities.

  In summary, Betfair represents the forefront of a new and innovative development within the betting industry, and is strongly in favour of the proper regulation of its business. We propose that many of the best practices that we now utilise should form the basis of future regulation of betting exchanges and that this will result in a strong industry, in which the UK will be the leading player. Furthermore, it will provide the responsible punter with the most exciting environment ever in which to bet, while at the same time making it harder for the criminal to use betting as a means to an end.

  We hope that this letter has helped outline some of the key points surrounding betting exchanges and Betfair in particular. Please do not hesitate to call me if you have any questions.

  9 May 2002

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