Regulation

A sting in the tale: industry positivity over House of Lords report is premature

The House of Lords analysis into the UK gambling sector has been treated with praise by both the industry and campaigners alike, but who is right to be most cheered?

The last month has been a tale of two reports. While the APPG push for a £2 stake limit was greeted with a mix of boos and jeers, the industry response to the House of Lords select committee report into gambling harm was altogether cheerier. The report, entitled Time for Action and with dozens of suggested changes, was greeted with a mix of tacit support and optimism. And that has clearly translated to the markets with share prices rising on the day of the report’s publication.

GVC’s Kenny Alexander called it a “thoughtful and measured contribution to the debate” and the Betting and Gaming Council noted it was an important report and there was much in there it supported. Speaking to other operators yesterday too, the pervading mood was positive and that this was a step in the right direction in terms of a serious and informed look at the sector. Interestingly, anti-gambling harm campaigners were also pleased with it, and at 170 pages in length it has a lot of scope for differing interpretation.

The wording is at once soft and challenging for the sector, and you sense the industry is looking at the former with some degree of confirmation bias. The report’s summary states: “We do not overlook that for most people who gamble this is a source of enjoyment that can foster social cohesion. We have been careful, in formulating our recommendations, to make sure that they impact on the undoubted benefits of gambling only to the extent necessary to make gambling safer for all.” This implies a softly, softly approach looking not to cut the industry off at the knees.

But there is no mincing of words at the potential harm gambling can cause. Some have chosen to focus on the allusion to alcohol in the report rather than tobacco in terms of its public health impact. But it’s worth noting that in the same sentence in the report that mentions alcohol also mentions drugs. It also goes on to say: “The unscrupulous methods and ingenuity of some gambling operators makes for shocking reading. Their tactics are to change their working methods just enough to avoid more regulation being imposed on them from outside; and to date that has worked well. This cannot continue.”

Optimism or wishful thinking?

The report makes it clear that gambling presents a serious public health issue. The industry optimism, you sense, seems to be that they will have time to tone down the more wide-reaching aspects of the report in discussions with politicians, and enough freedom around the key points of stakes, affordability, advertising and product to be able to convince those making the final decisions to not push too far in any revisions to the Gambling Act. The consensus seems to be that the wiggle room favours the industry.

While there are many supportive voices within parliament for the gambling sector and no sense from the government that they want to make swingeing changes, there is also a world of difference between quiet private backing and a willingness to put your neck on the line in public. There remains a pretty hostile media and impassioned campaigners and a set of proposals that can just as easily swing against the industry as in its favour. Who really wants to stand up and speak out for higher maximum stake levels on casino games, or for high volume in-play betting?

Because with even the most mildly pessimistic reading of the Lords report, those areas and many more are under real threat. The report lays out clear recommendations for a number of areas that could see restrictions on stakes, live streaming, more harmful products, which could include things such as in-play betting, sponsorships, advertising, affiliates and a clear mandate for a rigorous industry-wide approach to affordability. In fact, affordability is at the very heart of this report and it takes an ambitious approach to dealing with it.

Far from affordability being something dealt with at the individual operator level, there is a call for a joined-up approach with information sharing, financial blocking and a GAMSTOP-style, industry-wide exclusion for players who have breached limits on one operator. There is also a proposal for blocking payments to unlicensed sites as a means of dealing with any black-market risk from restricting staking or loss levels on UK sites. This is not a kid gloves approach to the industry and there is no doubting the desire for real and meaningful change.

Urgency of action

The report also stressed the urgency of action, as was clear from the title. And it grouped that action into three key areas: affordability, inducements to gamble, and regulating products based on their harm impact. The mention of inducements to gamble, a key part of the old Gambling Act that completely hamstrung the gambling industry in terms of marketing, is certainly an interesting one. They also stressed the importance of reform to gambling RET, the Gambling Commission gaining more bite in terms of increasing the size of fines and taking more action to suspend licences and of the need for an independent ombudsman system.

In terms of direct industry impact, however, it was the three big areas of affordability, marketing and product that present the most threats and challenges ahead. The industry says it is already making great progress on these areas and is ahead of regulation and can guide government on the best approach to dealing with them. The recent Gambling Commission report into the industry working groups would have given confidence in this with most areas getting a nod of approval, but, then again, the Gambling Commission concluded a £30 stake limit was fine for FOBTs.

There is also a view that with the pending recession and the huge debts built up over the Covid-19 crisis the Treasury will not be keen to cut back the cash cow that is the gambling industry. But there has been a definite shift away from previous Conservative government fears of increasing the debt burden in recent months and you can always make up the shortfall by hiking up the tax rates. This would not be a totally unexpected outcome of all this after all.

All that said, however, there are some positive signs to be taken. The industry is, in part if not in whole, making real progress around identifying and dealing with problem gambling and has revolutionised its approach to compliance and responsible gambling. There has been real change and there will continue to be more of it and the direction of trend is already towards affordability and limiting the more harmful impacts of some products. This is not the industry of the last decade even if the industry has been poor at conveying this message to the wider public to-date.

A crisis or an opportunity?

There are sections of the industry and the investment community who will also view this as much as an opportunity as a crisis. The potential savings in above-the-line marketing costs combined with squeezing out some smaller players, who are a large segment of online casino, looks very attractive on paper. There is even the concept that the industry will be more profitable without advertising, as proved the case with tobacco. But in reality, there is nuance to this that needs careful analysis. This historically has been a high-churn and high-switching industry, at least at the player level, with only a very recent move away from its image as a vice sector. And dealing with a restrictive advertising and marketing environment and tighter regulatory controls does not immediately resemble an industry with fantastic growth prospects.

You would also question why if TV and radio advertising and sponsorships were so EBITDA negative then why some of the most successful operators continue to do it at such scale. It is not always defensive. The short-term positive impact on EBITDA margin must be balanced against longer-term issues. This is frequently a high-churn sector, especially in gaming, and even post regulatory changes, there will be a relatively low barrier to entry. As the ability for the big players to saturate the marketing space diminishes, not least if free bets or other inducements are not permitted, then quite feasibly the playing field may level a little for smaller operators.

Brand awareness is likely to diminish, too. It is hard to maintain a brand built in part via TV without above-the-line advertising and hard to acquire players without offering inducements to gamble. Not impossible certainly, but harder. There is also the challenge of needing to move into the mainstream consumer sector for future growth, attracting new demographics and increasing share of wallet from more casual bettors. These challenges become infinitely harder in a more heavily restricted environment. A future of four big brands fighting to capture share from each other doesn’t sound that compelling in comparison to a rapidly growing mainstream consumer entertainment market.

But now is not the time for complacency. The industry in its entirety has to appreciate the existential threat that is facing it and not continuously assume it can contain the issues that seek to not destroy but dismantle what it has built up over the past two decades. If 2020 has taught us anything, it’s that our inability to prepare adequately for worst-case scenarios is a frustratingly common trait. And for an industry used to dealing with the sharp end of variance you would hope it wasn’t a mistake the online gambling sector would make.

Some of the headline points in detail

Affordability

The Gambling Commission must amend its Formal Guidance for Remote Gambling Operators to define the minimum steps which operators should take when considering customer affordability […] allowing operators to share with all other operators the information they derive from affordability checks on individuals. It should be a condition of gambling licences that where an operator’s affordability check throws doubt on whether an individual can safely gamble at the rate they have been doing, this information should be shared with all other licensed gambling operators, which will be bound by it in the same way.

We recommend that the banks should work together with UK Finance to create an industry-wide protocol on blocking gambling payments, with at least a 48-hour cooling off period. The Gambling Commission, the Betting and Gaming Council, and UK Finance should work with the Information Commissioner’s Office to create a consistent industry-wide approach on the sharing of customers’ financial data for the purpose of affordability checks.

The report’s main focus is on affordability and with this being a long-held point of agreement between the industry, campaigners and the regulators it feels an inevitability we will see some action on this point. It should also be noted that a focus on affordability rather than hard loss or deposit limits is a definite positive for the industry in the longer term even if it means more pain in terms of operational complexity in the short term.

What is most interesting about this report’s approach is how it looks to extend affordability and the responsibility to manage it beyond individual operators and to form some kind of collective approach to the issue. There could be an attempt to use this to delay implantation, but just as importantly this would have larger implications in terms of share of wallet for tier two and tier three operators as well as knock-on impacts for ARPUs generally.

CRM

Advertisements which are objectively seen as offering inducements to people to start or to continue gambling, or which create a sense of urgency about placing bets, should be banned. The licence conditions should be amended to prohibit operators from sending communications offering inducements to bet to individuals, or identifiable groups of individuals, unless they have agreed to take part in VIP schemes.

The area around marketing and the key phrase inducements to gamble is hugely open to interpretation and could be seen as just a block on language in broadcast advertising encouraging people to place a bet. The second part of the recommendations, however, implies a more subtle approach aimed at CRM communications with bonuses, free bets or other offers aimed at higher-value customers. Any major restrictions here would be very impactful for gaming operators in particular.

Stake levels

We recommend that the government should reinstate the triennial reviews of maximum stake and prize limits, and they should be extended to include both gaming machines and online gambling products.

This is the one with the most wiggle room for the industry, as unlike the APPG report there is no minimum level suggested and no implication that land-based levels as currently set would be the de facto maximum. Even if the online sector were aligned with land-based machine gaming then the working maximum stake level would be £5, although there is a non-operational machine category with unlimited stake or prize limits. A £5 limit would not be ideal for online but feels very workable for the industry. That said the maximum slots prize for land-based casinos is £10,000, which rather does not.

Table games would have much higher limits, however, which would be vital for the live casino segment. But this is all to assume any review would use this as the starting point and not conduct a more ground-up analysis, nor take a more safety-first approach. Is there any reason to assume when addressing what are viewed as fundamental regulatory failings to-date that the starting point for new regulations would not be more cautious?

In-play

We recommend that the government should work with the Gambling Commission to establish a category system for online gambling products. The government and the Gambling Commission should use the online product categories to set stake limits for online gambling products.  

A casual reading of this would assume this means high-speed slots or roulette will be limited and everything else will be fine. But in recent discussions around gambling harm and the role of in-play sports has started to come increasingly to the forefront and could be at real risk of restrictions or limits here. There’s also the possibility of other products getting reassessed in light of a more ground-up assessment of the various gambling verticals with relatively little outside of pre-match sports betting feeling “safe” in this regard.

Live streaming

The social responsibility code of practice must be amended to prohibit licensees from offering bet to view inducements, such as making the watching of a sport conditional on having an account with a gambling operator. The consequence of this will be that the Football Association, any other body with the rights to show football matches, and anybody with similar rights in relation to other sports, will no longer be able to sell those rights to licensed gambling operators.  

The report is very clear on this point, albeit the understanding of the model is more than a little off kilter. Streaming that is provided to account holders only should not be allowed for any sport. This would presumably be limited to UK-based leagues, although that does then open up questions over using non-UK sports for the same purpose. The solution could be to open everything up to free-to-view, but this raises other issues in terms of the rights deals. The chances are this will be too complex an area to regulate efficiently and will be too destructive to the suppliers that depend on this income stream to make it to the final review, but it’s a clear warning shot that should be heard.

Affordability | House of Lords | In-play | Regulation | UK Gambling Commission | UK government

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