House of Commons - The Gambling Act 2005: A bet worth taking?

The Gambling Act 2005: A bet worth taking? - Culture, Media and Sport Committee Contents

3 The industry, tax and regulation

97. Given the importance of a competitive environment to maintaining consumer protection as well as a healthy industry, we were concerned to be told by several industry contributors that the 2005 Act had added to some of the financial pressures which, arguably, have begun to distort competition within the gambling industry.[124]

Factors external to the Act

98. Evidence from the land-based gambling industry suggested that it had been significantly affected by the general economic downturn as well as by the 2007 smoking ban.[125] Gala Coral Group told us that it had experienced a "30% impact on profitability", losing £120 million per annum in profit as a result of the combined effects of the smoking ban, increased tax and the removal of certain types of machines under the Act.[126] The availability of more online gambling opportunities, with unlimited stakes and prizes and the ability to smoke at home, has had a negative impact on the industry, and possibly the bingo sector in particular.

Tax policy

99. Throughout the consideration of the Gambling Bill, it was acknowledged that the type and level of taxation to be imposed on the industry was critical to the success of any future regulatory regime.[127] However, the 2003/4 Joint Committee on the draft Gambling Bill was unable to examine this key issue as the Treasury had decided not to make any proposals for a new tax regime to operate alongside the new regulatory system until after the passage of the Gambling Bill. The Joint Committee was told by the then Economic Secretary to the Treasury, John Healey, that the new system of regulation would have to be in place before the tax regime for gambling could be finalised.[128] Despite the Joint Committee having concluded that tax was a "critical factor" in future inward investment in the gambling industry, and that HM Treasury and the DCMS should work together closely to ensure a robust policy, the final Gambling Bill had no accompanying proposals for a new tax regime which would follow from the Act.[129]

100. It is unsurprising, then, that many concerns about the operation of the Act stem from a taxation policy which seems disconnected from gambling policy. There are two separate issues that apply to the whole industry. The first is whether the level of duty charged on each sector is appropriate to achieve the aim of maximising tax take, while not unduly inhibiting the gambling industry. The second is the failure—in relation to online gambling—to establish a tax regime which would allow the UK-based online industry to compete with the offshore industry. Such a tax regime would, it is argued, bring operators into the UK, benefiting the economy, creating jobs and increasing customer protection. This last effect would arguably come about because UK-based companies are regulated by the Gambling Commission as well as being physically accessible for inspection and, if necessary, enforcement measures.

101. Various changes in tax rates for gambling made in successive budgets have been cited as damaging to parts of the industry.[130] In 2006, changes affected B2 machines; in 2007, casinos; and in 2008, bingo. Ladbrokes told us that profitability had "severely declined" since the Act, and that "far from encouraging economic progress, all indications suggest that the high levels of taxation and regulation have impeded growth".[131] We heard evidence from the casino industry that tax increases have also made 2005 Act Casinos unattractive to investors, thus stifling growth. Recent consultations on tax proposals have also caused some concern in parts of the gambling industry that investment would become harder in the future.

BINGO TAX

102. Prior to the 2005 Act, the bingo industry paid a bingo duty based on turnover, and calculated as a percentage of staked money and winnings, and it also paid VAT on participation fees, from which other sectors of the gambling industry were exempt. This "double taxation" left the bingo sector highly taxed compared to the rest of the industry. In 2003, bingo taxation was reformed in order to bring it in line with the wider industry: turnover tax was abolished and bingo was subject to a gross profits tax (GPT), charged at 15%. VAT charges were removed later. In 2009, the Government increased bingo GPT from 15% to 22%.[132] In 2010 this rate was reduced to 20% because of industry complaints that 22% was too high.

103. Bingo operators still hold that they are charged an unfair level of tax compared to the rest of the gambling industry. The UK online industry paid Gaming duty at 15%, whilst casinos paid between 15 and 50%, depending on their gross gaming yield. Gala Coral Group stated that "it is patently unfair that the 'softest' of all forms of gambling (bingo) is charged the very highest base rate of Gross Profits Tax (20%)".[133] Paul Talboys of the Bingo Association blamed the current tax situation for creating a "hostile" investment environment.[134] Chloe Smith, the Economic Secretary to the Treasury, argued that the bingo tax rate was within the same "effective tax rates as the National Lottery and casinos".[135] The National Lottery pays lottery duty at the rate of 15%. She also told us that "a reduction in bingo duty to, for example, 15%, would cost the Government around £25 million to £30 million per annum". However, an Ernst and Young policy paper argued that a reduction in tax for bingo to 15% would actually lead to an increase in the overall tax take from the sector, resulting in a net benefit to the Treasury "of over £65 million over the period 2011 to 2014".[136]

104. We recognise that the Bingo sector remains highly taxed in comparison with other sectors despite its status as one of the softest forms of gambling. In principle we believe that bingo should be taxed in line with other forms of gambling at 15%. Moreover, we recommend that the Treasury make an assessment, within the next financial year, of the likelihood that a reduction in bingo duty, to 15%, would result in increased investment in the bingo sector and a rise in net tax take.

CASINO TAX

105. The tax regime for casinos is extremely complex and it is very difficult to make an accurate comparison of rates between countries because of the number of different tax regimes for gambling products and the different market environments which exist in otherwise comparable jurisdictions. The National Casino Industry Forum argued that the UK casino sector was disadvantaged compared with those in other markets because of the UK's high tax rate and increasing competition with online gambling operators, which are less regulated and pay little or no tax.[137] Moreover, the Rank Group suggested that the tax regime which followed the 2005 Act had actually set back the goal of protecting the vulnerable, including children, from problem gambling. It suggested that it had penalised—with higher gambling duty rates—those parts of the industry which provided the "highest degree of supervision and player protection in favour of those providing lower levels".[138]

106. The Chancellor of the Exchequer, George Osborne, made several announcements regarding gambling tax in his Budget Statement on 21 March 2012. In one of the changes he introduced a new machine gaming duty (MGD) replacing both Amusement Machine Licence Duty (AMLD) and VAT. This new MGD tax would be set at 20%, with a lower rate of 5% for some category D machines—those with a maximum 10 pence stake and £8 prize. Only Machines offering only non-cash prizes would remain subject to VAT instead of the new machine games duty. The Chancellor explained the change saying that:

The VAT treatment of gaming machines is being repeatedly challenged by operators in the courts, so I will introduce a new machine games duty, with a standard rate of 20%, and a lower rate for low stakes and prize machines of 5%, of net takings.[139]

107. The Association of British Bookmakers reacted to these changes saying that:

Despite assurances made during your Committee's Inquiry into the Gambling Act that the new rate would be fiscally neutral for the industry, the rate that was introduced was 20%. This is significantly higher than the rate we had calculated as being fiscally neutral for the industry and has an extra bottom line cost on our business sector of over £300 million over the next five years.[140]

108. Before the Budget, the Gala Coral Group had argued that the move away from charging VAT on gambling "means that VAT on capital investment is less and less recoverable thus destroying the case for investment in long term growth and job creation". It suggested that Gross Profits Tax should be off-settable against VAT on capital investment.[141] This would mean that the cost of new machines would be recoverable against the GPT paid on machine profits. The Government stated, in its consultation response document on machine games duty, that such measures—to limit the impact of the removal of VAT—could not currently be implemented as they were "either not permissible under EU law, would be highly complex to introduce, or would lead to significant avoidance risks".[142]

109. We are not convinced by arguments from the Treasury that measures to allow the offsetting of Gross Profits Tax against VAT on capital investment for gambling machines cannot currently be implemented. The Treasury should carry out further work in this area and identify a means by which such offsetting could be achieved. We also recommend that the Treasury make judicious use of industry analysis of the likely impacts of its proposed taxation measures. As it is in the public interest to maximise the tax take from the gambling industry, the Treasury should set tax at a level which allows investment in the industry and does not stifle growth. We recommend that the Treasury also take into account the likely impact on investment by the gambling industry in future tax-rate calculations. We recommend that any changes to machine gaming duty should be revenue neutral as the Economic Secretary to the Treasury assured us that they would be. If the rate of machine gaming duty raises more than a revenue neutral figure, the Chancellor should reduce the new rate to ensure that revenue neutrality is achieved.

ONLINE GAMBLING

110. The current taxation system for online gambling is levied on a point-of-supply basis, meaning that only those companies based in the UK are taxed here. Ladbrokes told us that whilst "operators in the UK pay 15% tax on their Gross Profits, 10.75% horseracing levy on British horseracing bets and VAT on their input costs [...] the vast majority of offshore operators would pay a capped rate of tax, representing a significant tax advantage".[143] It said that this "uneven playing field" had caused it to close its call centre in Aintree, which affected 263 jobs.[144] William Hill and Ladbrokes argued, prior to the 2012 budget, that a level playing field should be created by extending UK regulation and Gross Profits Tax (GPT) to offshore operators and betting exchanges, and by providing relief to UK retail and online operators through a lower rate of GPT.[145] The Gala Coral Group argued that, to prevent an illegal market developing, a single rate of gross profits tax, set at 10%, should be applied across all gambling products and delivery formats.[146]

111. As a consequence of the anomalies produced by the current tax system for online companies based in the UK, only one major such company—bet365—remains based here. Martin Cruddace of Betfair told us that that company had relocated its licence to Gibraltar in March 2010 "basically for competitive reasons".[147] bet365 has remained in the UK because of the company's and the founding Coates family's ties to the local community. bet365's Sports products are licensed in the UK and run from Stoke-on-Trent where over the last decade it has become the largest private sector employer, with over 1,900 local staff, although its gaming products have always been licensed offshore "due to historic restrictions within the UK".[148] Unlike its major online competitors, who are based in minimal tax jurisdictions such as Gibraltar and Malta, bet365 told us that it pays "approximately £130m in annual taxes in the UK—including corporation tax and none-recoverable VAT—of which betting duty comprises broadly 50%".[149] John Coates, Chief Executive of bet365, told us that remaining licensed in the UK "doesn't make economic sense and if we were a public company we wouldn't be able to make that decision"[150] adding "for the continued viability of bet365 remaining UK-based, the introduction of 'Point of Consumption' based taxation measures in the UK will be essential".[151]

112. Following from the Government's announcement that it was going to move gambling regulation to a point of consumption basis, the Chancellor announced—in his Budget Statement on 21 March 2012—that a point of consumption tax would be applied to online gambling, meaning that all operators offering online gambling products in the UK would be subject to UK tax. He also said that double taxation relief would be introduced for remote gambling from April 2012. This would allow online gambling companies to base themselves within the UK, and market products in other jurisdictions without being subject to each jurisdiction's full burden of tax. It is also important, for operators such as bet365, to have removed 'double taxation' as it is a further threat to the economic viability of locating in the UK, as more overseas countries develop their own gambling regulations, including point-of-consumption taxation.

113. The Chancellor set out his reasons for the changes as follows:

Ninety per cent of online gambling consumed by our citizens is now supplied from outside the UK, and the remaining UK operations are under pressure to leave. This is clearly not fair—and not a sensible way to support jobs in Britain. So we intend to introduce a tax regime based on the place of consumption—where the customer is based, not the company—and, from this April, we will also introduce double taxation relief for remote gambling. These changes will create a more level playing field, and protect jobs here.[152]

114. In a 2011 report, produced for William Hill, Deloitte found that "the imposition of a POC [point-of-consumption] tax had the potential to prompt significant growth in the size of the grey market".[153] The report stated that a 10% POC tax rate would lead to 27% of the industry (primarily smaller operators) being at risk of leaving the market. At 15%, the tax could lead to 40% of the industry leaving the market. It suggested that, were the offshore market to be effectively regulated, the impact of a POC tax could be mitigated as illegal operators—paying less or no tax—would be less able to infiltrate the market.[154]

115. William Hill's online operations are currently based offshore and the Deloitte report was not echoed in other evidence to this inquiry. In its written submission, for example, bet365 did not call for a cut in the 15% rate of Gross Profits Tax in order to remain competitive, and was unequivocal in its support for the general change of policy. "The Point of Consumption basis, coupled with sensible regulation," it said, "would result in the major operators taking up a licence in the UK, with consequential increases for UK tax revenues, and would also encourage companies to base themselves in the UK".[155]

116. Since the Budget, the Government has issued an in-depth consultation paper seeking the industry's views on a specific framework for the effective introduction and enforcement of a POC tax on online gambling. The consultation closed on 28 June 2012, following which the Government intends to bring forward final proposals for implementation of the policy by December, 2014. The time delay reflects the Government's wish for tax changes to be implemented in tandem with regulatory changes, which are within the remit of DCMS, and include preparing the Gambling Commission for its expanded remit in handling the new licensing regime.[156]

117. The failure of the Department for Culture, Media and Sport to work with the Treasury to set remote gambling taxation at a level at which online operators could remain within the UK and regulated by the Gambling Commission has led to almost every online gambling operator moving offshore whilst most are still able to advertise and operate into the UK. We therefore welcome the announcement, made in the 2012 Budget Statement, that the online industry will be taxed on a point-of-consumption rather than a point-of-supply basis. We also welcome the detailed consultation with the industry since the Budget over the design of the policy framework and look forward to the Government's response. To give certainty to online operators, and their investment plans, we urge the Government to adhere to its timetable for implementation by December, 2014 and to make plans to deal with any challenges to the proposed new system. However, the Treasury still needs to work with industry stakeholders to establish the correct level for online gambling taxation, taking into account the need to encourage companies to accept UK regulation and taxation and to discourage the formation of a grey market.

Regulation and the impact of the Act

118. Even though it was not the purpose of the 2005 Act to increase the profitability of the gambling industry, some provisions have had a positive financial impact on particular sectors, including the abolition of the demand test and the waiting period for obtaining membership of a casino, and the introduction of new machine numbers and types in certain venues. The use of credit cards in gambling premises was also permitted under the Act; previously it had been possible to use credit only for online gambling.

119. Bingo industry representatives told us that they thought their sector had broadly benefited from the introduction of the 2005 Act.[157] The removal of the demand test by the Act required local authorities to permit the opening of new bingo clubs unless they were likely to have an impact counter to the three primary regulatory objectives of the Act; and the Act also removed advertising restrictions and permitted extended opening hours.

120. Nonetheless, parts of the industry argued that the benefits of the changes set out above were small and did not outweigh the negative consequences they attributed to the Act. Business in Sport and Leisure, for example, told us that:

Despite costs increasing and other factors affecting the industry, few liberalisation measures have emerged to offset these changes. Those developments which could have made a demonstrative impact—for example the availability of FOBTs and uplift in online custom—were happening anyway irrespective of the Gambling Act. Any new changes as a result of the Act [have] only made a limited difference to the bottom line of operators.[158]

The key areas where it was argued that the 2005 Act had had a negative financial impact on the land-based UK industry, including the bingo sector, were machine allowances, regulation, and licensing costs. We discuss the last of these in our chapter on the new Gambling Commission.

TRIENNIAL REVIEWS

121. Prior to the implementation of the Gambling Act 2005, the Gaming Board had established a system of routine reviews of stakes and prizes, conducted every three years—the Triennial Review. This ensured that monetary limits were adjusted to reflect inflation and took into account contemporary spending habits, and it had the advantage of maintaining a balance within the industry by covering all the sectors' allowances simultaneously. The three year cycle also drove the gaming machine manufacturing industry, as there would always be a need for new machines offering the newest level of stakes and prizes.

122. Since the 2005 Act, the Gambling Commission has conducted two reviews in response to calls from industry stakeholders to increase stakes and prizes or machine numbers. A number of industry stakeholders argued for the reinstatement of some form of regular review procedure, arguing that sporadic reviews had a detrimental effect on the machines industry and had further skewed balance between sectors within the industry.[159] Gala Coral suggested that, as an alternative to the Triennial Review, the Gambling Commission should report annually to the Government with evidence-based recommendations for changes to machine allowances, technical standards and stake and prize limits. It argued that this would "depoliticise" the review process.[160]

123. Whilst industry members argued for a liberalisation of machine numbers and stakes and prizes, stakeholders from outside the gambling industry held that the current system of reviews had been driven by industry pressure and was not evidence based.[161] The Evangelical Alliance said that the recent stake and prize reviews by DCMS had concentrated on industry demands and excluded concerns over consumer protection against problem gambling.[162] The Heritage and Tourism Minister, John Penrose, told us that, in response to calls from various stakeholders, DCMS was launching a new system of triennial reviews of stake and prize limits for gaming machines.[163]

124. We welcome the reinstatement of the Triennial Review system for gambling machine stakes and prizes. These reviews should be designed to maintain the value in real terms of stakes and prizes, as is the case with other industries where prices are controlled by the Government, rather than as a means of increasing industry profitability. A Triennial Review system has the potential to lead to significant calls from all sectors of the industry that they should have their machine allowances and/or stakes and prizes increased on a regular basis. It is important therefore that these reviews are carried out on the basis of evidence, are as open and depoliticised as possible.

ONLINE GAMBLING

125. Online gambling was available in the UK prior to the introduction of the 2005 Act, but only from outside the UK.[164] British-based companies were prohibited from offering or advertising online gaming in the UK. This had the perverse effect that those companies least likely to meet UK standards for open, fair and crime-free gambling were the only ones allowed to offer online gambling. Online providers can offer the full range of gambling products: casino games, bingo and gaming with no limits on stakes and prizes, benefiting from 24 hour operation, extreme convenience and the ability of customers to smoke at home.

126. One of the key motivations behind the Gambling Act 2005 was the wish to impose regulation and order on the online sector, partly to protect UK customers from unregulated, possibly unscrupulous, operators and partly to make Britain a base for the expanding online industry. The remote gambling sector has been the most significant area of growth in the gambling industry over the past decade, and continues to be the fastest growing area. This has been fuelled primarily by online betting, which is particularly attractive to customers because they can easily compare odds across a number of sites and pick the most favourable; and online poker, which is attractive because customers can find a wider pool of players online than in a casino. Moreover, the availability of online gaming is increasing as a result of rapidly changing technology. Bets can now be placed and games of chance played on a myriad of desktop and handheld devices and can be made 'in-play' in sports betting, fuelling further growth in the sector. Betfair told us that the online sector in the UK currently had a gross gaming yield of around £1.7 billion, about a fifth of the size of the offline UK gambling market. It estimated that over the next four years the European online industry would grow by 34%, compared to 7.2% for the offline industry.[165]

127. The implications for problem gambling levels of this rapid increase in the availability of online gambling opportunities are, however, largely unquantified. The 2001 Gambling Review Report noted particular concerns arising from online gambling such as: its availability 24 hours a day; the lack of breaks compared with those between games in traditional casinos; and a negligible entry requirement. Furthermore, unlimited stakes and prizes are available over the internet. The 2010 BGPS figures showed that 14% of adults used the internet to gamble in the previous year (including lottery tickets, betting, casino games, bingo, slot machine style games and football pools).

128. The regulatory system set up under the 2005 Act works on a point-of-supply basis, meaning that only those companies that locate key equipment in the UK are regulated by the Gambling Commission. However, in addition to allowing British online companies registered by the Gambling Commission to advertise, the 2005 Act also allowed online companies based in the EU and EEA States, including Gibraltar, to advertise in the UK. It extended the same permissions to a number of other "White-Listed" countries, specified by the Secretary of State. The White List identified jurisdictions that were deemed suitably stringent in their online gambling regulations so that UK customers would be safe to use gambling sites regulated by them. The White List includes places such as the Isle of Man, Alderney and Tasmania.

129. Antigua was controversially allowed to join the White List in 2008. Doubts were expressed in Parliament as to the state of Antigua's regulatory regime, and whether the Gambling Commission was in a position to test its regulatory rigour. This led the then Minister, Gerry Sutcliffe, to conduct an inquiry into the White List, and all applications to it closed in April 2009, which barred later developers such as Jersey from inclusion.[166]

130. Before the Act, most online companies moved their operations to jurisdictions such as Malta or White Listed countries. They are not regulated by the Gambling Commission, although other regulators argue that regulations in these countries are equally stringent when addressing, for example, under-age and problem gambling.[167] The limited effectiveness of the 2005 Act at providing a regulatory framework for online gambling has been acknowledged by the Gambling Commission and DCMS.[168]

131. Arguably, current arrangements for online regulation put UK customers at greater risk of problem gambling and gambling-related harm. This is because overseas sites, whether regulated or unregulated, may not have in place as strong safeguards to protect UK customers. Indeed, several faith groups voiced their concern that gaming sites which were not regulated by the Gambling Commission could be accessed by UK residents. However, the Remote Gambling Association agreed with William Hill that "there is little or no evidence that the offshore operators based primarily in Malta and Gibraltar pose any public protection risk to UK Citizens".[169] Solicitors Wiggin LLP argued that the majority of sites accessed by UK customers are based in DCMS-approved, White-Listed jurisdictions and that they "invariably have extensive programs of social responsibility that include detailed multi-level age and identity verification programs" and "programs to identify repetitive or 'problem' gambling patterns".[170] Regulators from some White-Listed jurisdictions told us that they implemented regulatory processes that were in some instances more stringent than those in the UK. The Jersey Gambling Commission pointed to the fact that Jersey's legislation and its regulatory principles were closely based on the British Gambling Act 2005,[171] although Jersey was not allowed entry into the White-List because of the moratorium placed on new applicants in 2009. The Alderney gambling regulator (AGCC) told us that its licensees were required to contribute to research, education and treatment programmes in the UK. It said that UK-facing licensees had contributed more than £1 million to the GREaT Foundation in the previous year.[172]

132. The Gambling Commission currently conducts an intermittent mystery shopping programme which covers both UK-regulated and non-UK-regulated online gambling providers. The Commission found that, of Commission-regulated sites tested, over 99% of active customer accounts were registered with operators which had easily accessible problem gambling information, self-exclusion measures and financial limits. It concluded from this 2009 research that "the vast majority of the largest operators and those with the greatest UK-facing business have sufficient social responsibility measures in place" and that those with identified weaknesses only accounted for a "small percentage of the customer base".[173]

133. We have seen no evidence to suggest that the existing White Listed jurisdictions pose a greater threat of problem gambling than UK or EU-based operators. However, the possible link between online gambling and problem gambling must be addressed alongside any future regulatory and licensing regime for online gambling. Online gaming has been identified as having certain characteristics which may be associated with problem gambling, including high speed of play, frequency of play and ease of availability. We consider that a vital aspect of gambling regulation is controlling the significant, and growing, online sector with its unlimited stakes and prizes, and its potential to cause problem gambling. The Commission's plans for licensing online operators will rely heavily on other regulators which the Commission has very limited means of monitoring. The Commission should aim to improve its links with overseas regulators for the purpose of spreading best-practice in terms of customer protection and problem gambling prevention.

An uneven playing field

134. An actual consequence of regulating and taxing only UK-based operators is the creation of a "grey market" comprising companies operating in less regulated or unregulated jurisdictions. Offshore companies such as these are able to attract customers from regulated—UK or White-Listed—jurisdictions because their lower costs allow them to offer better odds. Those customers could then be at risk from unscrupulous operators. Regulating only UK-based operators also means that the Commission has access to very limited information about online gambling, as only 20% of the market (principally one operator, bet365) is now obliged—as a licensing condition—to provide the Commission with information.[174]

135. Wiggin LLP was concerned that not enough was being done to block UK customers from accessing non-White-Listed, offshore gambling sites.[175] It argued that those operators that were not regulated by the UK, or in a White-Listed jurisdiction, should be subject to "regulatory action".[176] In her evidence to us, Tessa Jowell acknowledged the difficulty of preventing customers from using unregulated online gambling sites, saying that it was important to communicate with "the gambling public [so] that they understand the risks that people take if they are using unregulated sites in jurisdictions that we have absolutely no relationship with".[177]

136. The Northern Ireland Horse Racing Group expressed concern that the land-based industry was being harmed by the current situation, saying that "loopholes in current gambling regulation are being exploited by unlicensed operators. They have a severe impact upon the betting sector and damage important industries that rely on commercial arrangements with licensed organisations".[178] Betfair argued for a requirement for operators targeting the UK to hold a UK licence, prohibiting non-licensed operators from marketing into the UK, and making it an offence for non-licensed operators to transact with UK consumers.[179] Bwin.party, however, expressed a different view, stating that current regulation was delivering an excellent framework for consumers, who had "access to a wide choice of operators at competitive prices" and low problem gambling levels. It argued that the UK already had "a mature, well-established and well-regulated gambling market, one that represents an attractive model for other European countries."[180]

137. There has been one particularly high-profile case where a licensed operator has been accused of failing to protect its customers—and specifically their funds: Full Tilt Poker. This company was registered in a number of jurisdictions, including the White-Listed Alderney Gambling Control Commission. Despite this, when it was closed down for breaking US law, it did not have the resources to repay players their deposits. We questioned the Minister about this, and he responded that the Gambling Commission considered it would be too burdensome and would render the industry too uncompetitive to require operators to hold a separate players' winning account, or appropriate insurance, or to provide a guarantee that repayment to players could be made at all times. However, the Minister also acknowledged that players gambling online often took no account of whether their funds were protected, and he said that the Commission was considering ways to raise awareness of the potential risk to their funds. A full account of the case, which caused us considerable anxiety, is given in Annex 3 to this Report.

138. We welcome the assurances we have received from the Department of Culture, Media and Sport that it will take into account the lessons learned from the Full Tilt case, including the conclusions of the Report by Peter Dean to the Alderney Gambling Control Commission published in March 2012. We recommend that the Gambling Commission should consider, as a part of efforts to communicate to online gamblers the potential risks to their funds, introducing a kite-marking system for gambling websites, indicating which sites are regulated in the UK. This could protect consumers by encouraging them to use UK-regulated sites and by incentivising suppliers to choose to be regulated here.

139. We recognise the concerns of well-managed, existing operators about the potential costs and burdens of legally separating players' funds. In the light of the Full Tilt case, however, the Gambling Commission should consult the industry as to what form of 'ring fencing' or protection of player accounts, by all UK-regulated online gambling operators, would be a proportionate response to the worries arising from this unfortunate episode.

Online regulation: European proposals

140. As pointed out by Jenny Williams, Chief Executive of the Gambling Commission, the problem which inevitably arises from allowing an influx of companies to operate into the UK which are subject to regulation in other jurisdictions is the "variation in standards and capability".[181] In setting out her solution, she told us that:

The holy grail, the answer, is for us all to agree on common standards and a common way of compliance and enforcement. That is something that I have been pushing for, but we are a long way off it at the moment.

141. This has been the common theme of both the evidence we have taken and during our discussions on our visit to Brussels. There is broad agreement from national regulators and governments that what is needed is a system of agreed minimum standards for customer protection first within Europe but ideally to be extended globally. Indeed, the Green Paper produced by the European Commission Committee on the Internal Market and Consumer Protection sets out the "possible need for enhanced administrative co-operation between competent national authorities".[182]

142. Despite this apparent consensus, the differences which exist between many European countries in culture and attitudes to gambling has meant that it has proved impossible to agree on a system for developing common standards or on what those standards should be.

143. In its response to the Commission's Green Paper, the UK Government stated that the existence of multiple regulators and jurisdictions confused consumers and that there were also practical difficulties for the Gambling Commission in accessing information from operators not regulated by them.

144. Another possible option for regulating online gambling on a broader, European basis, is to introduce a Pan-European Licence which would be recognised by all or multiple national regulators. This idea has, however, met with extremely limited support. In May 2011, the Hungarian Presidency Report on online gambling concluded that only one country promoted the idea of a single Pan-European licence. The Report found that most member states were not in favour of mutual recognition or harmonisation and believed that they could not be obliged to accept results of procedures of another member state.[183]

145. In response to a European Commission Green Paper on gambling in the internal market, the European Parliament's Committee on the Internal Market and Consumer Protection made numerous recommendations about the way national regulators and the European Commission should approach the regulation of online gambling.[184] In addition to the broad principles already embodied in the Gambling Commission's core regulatory aims, the report proposed that advertising of gambling should be restricted to a level "strictly necessary in order to direct potential gamblers to the legal provision of services". It rejected, in accordance with the subsidiarity principle, any European legislative act uniformly regulating the entire gambling sector.[185] However, it did take the view that, "in some areas there would be clear added value from a coordinated European approach, in addition to national regulation".[186] The paper called for a "coherent system of lawful gambling services across Europe, especially in terms of tax treatment, and which applies common minimum standards of accountability and integrity" and for the European Commission to investigate how such a system could operate.[187]

Online regulation: Government proposals

146. In 2010, DCMS ran a consultation on remote gambling regulation which identified several reasons for changing the online regulatory structure. These included overseas jurisdictions having different regulatory standards, leading to customers experiencing varying levels of protection; not being compelled to report certain information e.g. suspicious betting activity; and not being obliged to contribute towards research, education and treatment of problem gambling.[188]

147. The Department proposed regulating the industry on a point of consumption basis in 2010, meaning that all operators targeting the UK would have to hold a UK Gambling Commission licence. It argued that this would increase consumer protection, "address concerns" about problem gambling; support enforcement activity (for example on sports betting integrity); "plug a regulatory gap"; and "remove market distortions".[189]

148. There are two issues which will be vital to the success of the Government's proposed change to regulating online gambling at the point of consumption. First, tax must be set at a level where the development of a grey market is not encouraged (we discuss this below) and secondly, effective enforcement measures must be put in place to tackle such a market, thus protecting the legitimate industry and the UK customer. The 2011 Deloitte report, produced for William Hill, argued that more effective enforcement measures against illegal or unregulated operators would have a significant impact on the health of the UK-based online industry and consequently on the tax revenue it would generate. It forecast that "ineffective enforcement could lead to 22-43% of current [tax] revenues migrating to the grey market at POC tax rates of 10-20%".[190]

149. There are numerous difficulties in effectively enforcing regulation on an online market where a large number of suppliers are based in other jurisdictions.[191]We heard from regulators in Europe and Australia that preventing unlicensed illegal operators from accessing their markets was extremely challenging. In Australia, the Interactive Gambling Act 2001 was introduced to update the law on online gambling. Enforcement measures included in the 2001 Act included warning letters to Internet Service Providers (ISPs) and search engines but not action against financial intermediaries or customers. Industry representatives told us that these limited enforcement methods had led to an uneven playing field between offshore and Australian online companies.

150. The Alderney Gambling Control Commission argued that there was no need to introduce a point-of-consumption regulatory system. It argued instead for an expansion of the current White-Listing system. The AGCC told us that it had "responded to the UK Government's proposition, pointing out that the White-List arrangement lacks only a proper verification process requiring overseas jurisdictions applying for White-Listing to properly demonstrate or substantiate their representations. With that addition, the White-List arrangement provides a no-cost means of effective regulation. In its absence there is significant risk of misrepresentation, reputational risk, reduced standards and a significant resource requirement to police overseas operations accessing UK players".[192]

151. The current regulatory framework for online gambling has failed to create a level playing field between operators based in the UK and those based overseas. This is because, whilst companies based in the UK are subject to strict regulation and high taxation, those based overseas can be lightly or unregulated whilst paying little or no tax. This situation could allow unregulated—'grey'—markets to emerge, able to attract UK customers because they can offer better odds as the result of their lower cost bases. It is therefore important that effective enforcement methods are put in place to prevent unlicensed companies from operating into the UK and that the Department for Culture, Media and Sport and other agencies also work to encourage international co-operation and a common approach.

Impact of regulatory changes on the Gambling Commission

152. Any change to the way the online market is regulated will have an impact on the way the resources of the Gambling Commission are used. The Commission has undertaken some limited monitoring activity of non-UK providers, conducting mystery shopping programmes on gambling websites, including those regulated overseas that advertise to the UK market.[193] However, requiring all operators targeting the UK to hold a UK licence would require substantial levels of regulatory and enforcement activity both to ensure that regulators in other jurisdictions apply and maintain appropriate regulatory standards and to block unlicensed operators from operating in the UK. The Alderney Regulator warned that "depending on the manner in which the UK Government introduces a full licensing scheme which will require all foreign based operators to be licensed by the UK Gambling Commission, it could result in duplication, increased cost to the industry and ultimately less protection for the UK consumer".[194]

153. When we asked Jenny Williams whether there were currently any jurisdictions whose licensing practices she would not, at the moment, consider to be up to Gambling Commission standards, she responded:

It is a problem of a lack of knowledge, isn't it? We do not know enough about the way they do things. We do not know enough about the competence of their staff. We do not know enough about their approach, and it would be very time-consuming to find out. It is not proven, if you like. We just do not know. We could not provide the assurance to the consumer.[195]

154. It is vital for the Government to recognise that the success of any new regulatory regime for online gambling will rest on the development and implementation of effective enforcement mechanisms for regulation. The Government's proposals for the regulation of remote gambling remain very unclear particularly with regard to how the Gambling Commission intends either to approve and monitor regulators in other jurisdictions or to directly regulate and licence all the individual companies which operate in the UK. It is not currently clear whether the Gambling Commission intends to carry out licensing checks on all companies that apply to operate in the UK. We recognise that it would be unrealistic for the Commission to inspect directly individual regulators across all other jurisdictions. We recommend that the Commission should approve certain overseas regulators and continue to monitor their performance where they meet its requirements. The Commission should undertake test purchasing exercises to ensure that these national regulators continue to carry out sufficient licensing checks. Such an approach would have the merit of encouraging international co-operation leading, in due course, to a more harmonised, consistent and less bureaucratic regulatory system across the 27 member states. For the sake of confidence and market knowledge, the Gambling Commission should also test whether regulators it has not yet approved carry out sufficient licensing checks.

155. Even if the Gambling Commission does not directly assess individual operators for their suitability to hold a UK licence, it will therefore have to make an assessment of which regulators it will allow to act as its agents—regulating online gambling sites targeting the UK on its behalf. The Department for Culture, Media and Sport should make clear how the Gambling Commission will assess the effectiveness of other national regulators and what the Commission will require of its agents. Any additional regulatory activities will have resource implications which the Gambling Commission will have to address within its existing budget.

156. Given that most UK operators have located their online operations offshore, this inquiry has heard concerns regarding the expertise of the Gambling Commission to monitor effectively a much larger number of online licence holders under the proposed changes to the regulatory regime. The Commission will, therefore, need to bolster its capability to do so, from within existing resources, as supplemented by licence income from the online operators it approves.

124 Ev 152, Ev W 32 Back

125 Ev W 32 and Ev 152 Back

126 Ev 152 Back

127 See, for example, Ev 227 Back

128 Joint Committee on the Draft Gambling Bill, Session 2003-4, HC 139-I, HL Paper 63-I, para. 653-4 Back

129 Ibid., para. 656-657 Back

130 Ev 152 Back

131 Ev 231 Back

132 At the same time AMLD (amusement machine licence duty) rose by 9%. Back

133 Ev 152 Back

134 Q 205 Back

135 Q 773 Back