The aftermath of the Football Index crash

The sudden and spectacular collapse of Football Index, the self-styled football stock market, early this year was the biggest failure in the history of the UK’s online gambling industry. The result was that customers saw portfolios worth more than an estimated £90m sink into oblivion along with parent company BetIndex, as the Jersey-based outfit went into administration in March shortly after the UK Gambling Commission’s (UKGC) belated decision to suspend its licence on 11 March.

Judging by users’ social media posts relaying how they lost their life savings with Football Index’s demise, the impact has been devastating for some. Many were also misled into believing they were investing rather than gambling. The situation was compounded by the fact Football Index had given the impression everyone was winning hand over fist. In fact, Football Index, which was the shirt sponsor of Championship clubs Nottingham Forest and QPR, in the past claimed in its marketing spiel that just 2% said they tended to lose money with Football Index. As others have pointed out since, the bubble was always destined to burst if 98% of players are winning.

Therefore, the independent review into the regulation of BetIndex, led by Malcolm Sheehan QC, was hotly anticipated. And when the 67,600-word document was published on 22 September, it certainly left no stone unturned as Sheehan presented the precise chain of events that saw BetIndex’s product enjoy hockey-stick growth, largely unchecked by the UKGC for the first few years, before the whole house of cards eventually came crashing down. After meticulously sifting through the 193-page report, we have picked out what we feel are five of the most pertinent and shocking aspects of Sheehan’s findings.

It took over three years for the UKGC to realise the product had altered dramatically

BetIndex was granted a licence by the UKGC in September 2015 after being established from the personal wealth of individuals associated with the start-up and £1m raised through the sale of a house. Originally, the product, fronted by CEO Adam Cole, was primarily about the awarding of dividends based on media ‘buzz’, yet it soon morphed into allowing customers to buy and sell ‘shares’ (these were bets that expired after three years).

The review suggests the UKGC was not made aware of this change in business model, including ‘instant sell’ functionality, and it wasn’t discovered until January 2019 when BetIndex applied for a further licence for a new entity, BetExchange, to act as an intermediary in operating the Football Index platform. This was rejected.

The UKGC noted in a compliance assessment carried out into BetIndex in February 2020 that the product on offer was much more complex and had moved significantly away from the basic model. Moreover, the UKGC did not consider that it would have licensed the product as it stood in February 2020.

Sheehan wrote: “Therefore, for the first three years of its operation, the Football Index product offered a key functionality, the ability for customers to buy and sell shares, that had not been regulated or properly appreciated by the Commission as part of the licence issued.

“It is this functionality, and consumers’ current inability to use it to sell their shares, that has generated much of the concern arising from the suspension of BetIndex’s operating licence.” In July 2019, an officer in the UKGC’s licensing division noted in an internal email that the product “mimics the functionality of the stock market”.

The officer added: “Although the operator did use some ‘market’ language in the original application, they were also very clear that it was fixed-odds betting. That seems to have changed in the last four years.” How this fundamental change in the business model went unnoticed for all that time is actually quite remarkable.

The UKGC seemed desperate for the financial watchdog to regulate BetIndex

What is apparent from reading the review is that Football Index became a regulatory hot potato that the UKGC struggled to understand and, more importantly, wanted to get rid of from a regulation standpoint. From logs of conversations between the UKGC and the Financial Conduct Authority (FCA), it is plain to see the gambling regulator was keen for the FCA to regulate part, or all, of BetIndex. The FCA was reluctant to do so, it appears.

Much time was wasted with both sides discussing whether the fact users were able to buy and sell shares meant the FCA should regulate the product. Other times, the FCA didn’t respond to the UKGC’s messages. This part of the review sums it up best: “According to the FCA, its view that the FCA would not take action in relation to the regulation of BetIndex was communicated to the Commission in a telephone call on 10 February 2020.

“The Commission, however, does not appear to have understood the FCA to be stating definitively that it would not regulate part of the product, as the Commission continued to seek meetings to discuss dual regulation of BetIndex over the following year until the company’s licence was suspended.”

While both bodies, along with legal representatives for BetIndex, went round in circles debating whether Football Index was a betting or financial product, as well as the terminology used on the site, users continued to make deposits and others signed up. By January 2020, BetIndex onboarded 20,000 new customers in a single calendar month.

As a result of the review, the UKGC and the FCA have said they are already taking steps to improve ways of working going forward and have “developed a strengthened” Memorandum of Understanding.

Market-making activities were, well, suspect

One aspect of the document that caused a stir was around market-making and the fact the value of the market and the players’ values could be directly impacted by BetIndex. In February 2020, the UKGC’s multi-disciplinary team conducted a full compliance assessment of BetIndex, which flagged up a “number of concerns relating to the product, processes, procedures and controls in place”.

One of these concerns related to the company’s market-maker for Football Index. Sheehan noted that as well as creating new shares and adjusting the algorithm, BetIndex was able to buy and sell shares through its own account run by a market-maker. What’s more, the review revealed this market-maker reported directly to the board but was not subject to independent oversight. The market-maker, who worked seven days a week, could buy and sell to impact the market but had insider information which was not available to other players and a detailed understanding of the algorithm.

BetIndex advised the UKGC in February 2020 that there was around £115m worth of trading in the market (current cash-out value of all shares at instant sell value), and within that included a £2.9m share portfolio derived from activity carried out on BetIndex’s market-maker account. These revelations regarding the market-maker’s activities led to consternation on Twitter when it was shared online. “Someone should probably go to prison for this bit,” tweeted former Coral football trader Nick Goff.

The warning signs were clearly there

BetIndex was categorised as a ‘small operator’ by the UKGC between 2015 and 2018, yet it wasn’t until 2019 when it was re-categorised as a ‘high-impact operator’ that UKGC officials began to scrutinise the company’s operations. The reason for the regrading was that BetIndex’s gross gambling yield (GGY) had exceeded £25m for the first time. In addition, an internal email at the UKGC in May 2019 pointed out that BetIndex had more than 1.8 million customers, of which 100,000 were active.

The staggering GGY growth the business experienced – 2015 £90,839, 2016 £483,538, 2017 £2,989,471, 2018 £15,510,860, 2019 £39,427,609 – should have set alarm bells ringing far sooner. What’s more, the UKGC received 82 complaints or criticisms of aspects of BetIndex’s conduct between 11 August 2017 and 18 March 2021. The French gambling regulator also contacted the UKGC’s Sports Betting Intelligence Unit in February 2019 to question BetIndex’s business model. “For me, it is more FOREX than betting,” an official stated.

An enquiry about the business model was also made by the Football Association. The CEO of an unnamed operator wrote to the regulator in January 2020 suggesting Football Index customers were “being broadly misled, misinformed and encouraged to gamble irresponsibly”.

The CEO continued: “The daily increase of customer funds at risk makes this matter incredibly sensitive, serious and urgent, and we have no choice but to contact you directly.”

On 31 January 2020, the UKGC met with the operator’s representatives in which they presented a document entitled Football Index – £100m of customer money at high risk. The document alleged that Football Index was operating an “exceptionally dangerous pyramid scheme under the guise of a ‘football stock market’”, and added that “nearly £100m of customer money” was at risk and growing daily. “Immediate and urgent action is required to alert and protect their users,” it stated.

Despite the red flags, as well as claims on social media and other emails to the regulator that Football Index was possibly a Ponzi scheme, the UKGC didn’t suspend BetIndex’s licence until 11 March 2021. One reason for the reluctance to act was the fear of sparking a collapse in the prices of footballer ‘shares’ and causing a ‘run on the bank’.

The UKGC is under-resourced to properly regulate the market

Because BetIndex was classed as a small operator and, in line with the UKGC’s budget, resources and regulatory model, it wasn’t proactively monitored, the review noted. That said, the review revealed the UKGC’s compliance division consists of 35 people, eight of whom are focused on the National Lottery.

The regulator has oversight for around 2,800 licensees and the National Lottery, yet in 2015 when BetIndex applied for its licence, the licensing arm had 46 employees handling responsibilities relating to 3,000 operators and 30,000 personal licence holders. The review said in the financial year 2015/16 the UKGC received 273 new operating applications, of which 93 included betting activities.

Sheehan wrote: “The Commission has told the Review that since 2015 it has seen significant shifts in the gambling market reflecting wider technological and consumer trends in society, in particular a shift to online gambling. This period of rapid growth has also seen an increase in the complexity of business models and product offerings, with the lines between betting as defined in the Gambling Act 2005 and other types of products becoming increasingly blurred.”

He added: “Whilst the Commission’s 2015/16 income was around £19.21m excluding grant in aid funding for National Lottery functions, with 290 staff, the equivalent income for 2020/21 is £18.87m, with 338 staff overseeing around 2,800 firms and 16,500 individuals. The review understands increased licence fees for online operators are to come into force from October 2021.”

Whether this increase can equip the UKGC with sufficient resources to properly monitor the UK online market remains in doubt. Either way, it’s little comfort to those who ploughed four- and five-figure sums, including life savings, into a product that ultimately imploded so spectacularly and believe the UKGC was asleep at the wheel.

CEO Andrew Rhodes, who has been in the post since June, issued this statement following the independent review into the regulation of BetIndex.

“No amount of explanation of what happened to Football Index will take away the justifiable hurt and anger its customers are experiencing having lost, in some cases, life-changing amounts of money when the gambling company collapsed. We accept and agree that we should have drawn a line under our efforts sooner, but this does not mean those customers would not have lost money in the event of the BetIndex company collapsing. Throughout this case, we sought the best outcome for consumers within the scope of our regulatory powers.

“The review provides a number of helpful recommendations for how both regulators can work better together and for how our regulatory approach deals with novel products. In recent years, we have seen an increase in the complexity of business models and product offerings. The lines between what is gambling and other types of products, such as financial services or computer games, has become increasingly blurred and no longer neatly fit into existing statutory definitions of gambling.

“We have already acted on a number of the recommendations in the report. This has included more explicitly novel products as one of the factors we consider as part of our assessment of a gambling company’s risk. We have also further strengthened the Memorandum of Understanding we have with the FCA so that issues that blur the lines between financial services and gambling are escalated and actioned more rapidly.

“Our actions were always focused on trying to protect consumers while we sought to bring the operator into compliance with regulations. This does not mean however that those customers would not have lost money in the event of the BetIndex company collapsing.”[/box]