On Dec. 3, 2012, the U.K. government published a long-awaited draft gambling (licensing and advertising) bill proposing changes to the basis upon which remote gambling is regulated in Britain. The bill covers less than one and a half pages, contains only four sections, and its proposals are for the amendment of only three sections of the 2005 Gambling Act. At first blush, this might suggest only minor changes. But on the contrary, if approved by parliament and passed into law, the bill proposes fundamental changes to the way online gambling is licensed and regulated in Britain and represents a reversal of the policy reflected in the 2005 Act. For the online gambling industry, it will have major ramifications in terms of licensing, regulation, compliance and, importantly, taxation. This is so whether operators are specifically targeting the British market or not.

The 2005 Act Policy
In formulating its online gambling policy for the 2005 Act, the British government rejected prohibition. As the then-Secretary of State Tessa Jowell, put it:

“Our concern is that if Internet gambling were to be prohibited, it would be driven underground and precisely the kind of protections that we want to extend to people would be impossible.”1

In contrast with the policy of the United States government, and significantly with that of many member states of the European Union, the British government determined that regulation and licensing of a free market was the right approach. However, Jowell had more ambitious plans. In the same interview, she expressed a hope that Great Britain would become a “world leader” in online gambling. The government aspired to lead the way in Europe with its comparatively early introduction of a licensing system for online gambling: Great Britain was to be the “home” of online gambling, basing its policy on compliance with the then Article 49, now Article 56, of the Treaty on the Functioning of the European Union. This article requires the abolition of all restrictions on the freedom to provide services across borders within the Union, even where those restrictions apply without distinction to national providers and to those in other member states.

Accordingly, the system embodied in the 2005 Act only required remote gambling operators to hold a license from the U.K. Gambling Commission if they had remote gambling equipment located in Britain. Operators based outside Britain, but licensed in the European Economic Area (EEA), which includes all member states of the European Union and Gibraltar, were permitted to advertise gambling services in the U.K. in reliance on a license issued in their home jurisdiction. Furthermore, Section 331 of the act gave the secretary of state the power by regulation to include other states. The so-called “white list” comprises Alderney, Antigua and Barbuda, the Isle of Man, and Tasmania.

The government’s expectation was that this approach would benefit British businesses in European and international gambling markets and that, by demonstrating best practice in gambling regulation in Britain, the country would be influential in improving standards of regulation across Europe and internationally. The basis of the legislation was therefore the point of supply, with only those operators locating part of their remote gambling equipment in Britain requiring a license, and operators from elsewhere providing gambling facilities to British customers being able to do so without a license, though prohibiting them from advertising unless they held a license within either the EEA or one of the white-listed jurisdictions.

Unfortunately, only two European Union member states, Malta and Great Britain, sought to adhere strictly to the provisions of Article 56. In numerous member states, restrictive regimes remained, and still do in some. Partly as a result of infringement proceedings by the European Commission and rulings by the European Court of Justice, a number of member states have reformed their licensing regimes. However, this has resulted in a framework of national licensing regimes, spearheaded initially by Italy and France, and followed by Spain and Denmark. These have received the tacit blessing of Europe’s institutions, but for the moment, gambling monopolies still dominate in numerous other EU member states, such as Norway, Sweden and Portugal. The trail blazed by Britain and Malta has not been followed by any other member state, and Tessa Jowell’s expressed hopes have been dashed.

The New Policy
Although the tax rate for online gambling in Britain is at 15 percent, considerably lower than in most European jurisdictions, it was sufficiently high to cause most operators to shun the licensing regime in Britain in favor of other jurisdictions, such as Alderney, Gibraltar, the Isle of Man and Malta. According to the current responsible minister at the Department for Culture, Media and Sport, Hugh Robertson:

“… it was unfair to GB-licensed gambling operators that overseas competitors benefit from access to the market in Great Britain without necessarily bearing a fair share of the costs of regulation, or research, education and treatment of problem gambling.”

The government has also highlighted numerous measures developed by the Gambling Commission in its Licence Conditions and Codes of Practice (LCCP) to improve consumer protection and to uphold the 2005 Act’s licensing objectives. Obviously these do not apply to operators based outside Britain, who are not currently licensed by the Gambling Commission.

The government accepts that the majority of operators currently targeting the British market, and particularly those from white-listed jurisdictions are subject to effective regulation, but there is concern on the part of the Gambling Commission that little is known about the licensing regimes in some emerging European jurisdictions whose operators nonetheless have the automatic right to target and advertise in the British market.

There is also concern that operators from overseas may not be required to report instances of suspicious betting activity to relevant sports bodies, creating a potential risk that match fixing and suspicious betting practices occurring on overseas licensed sites may not be reported to British authorities.

The consequence is that the bill proposes to effect a fundamental change to the basis on which remote gambling is regulated, from the current point-of-supply basis to a point-of-consumption basis. This reflects the policy of many other European member states. All operators selling into the British market will be required to hold a license from the Gambling Commission, and will therefore be subject to the provisions of the 2005 Act, its regulations, and the commission’s social responsibility and technical standards requirements. They will also be required to contribute to British problem gambling and regulatory costs.

The Provisions of the Draft Bill
Section 33 of the 2005 Act makes it an offense for a person to provide facilities for gambling without holding an operating license issued by the Gambling Commission. Its territorial reach is governed by Section 36, which provides that, in the case of remote gambling, the 2005 Act requires an operating license for the provision of facilities for remote gambling only in circumstances where at least one piece of “remote gambling equipment”2 used in the provision of those facilities is located in Great Britain.

Clause 1 of the bill amends Section 36 so that operators providing remote gambling facilities will require an operating license, even if no remote gambling equipment used in the provision of facilities is situated in Great Britain, but where those facilities are “capable” of being used here.

Secondly, the 2005 Act regulates advertising and gambling services in Great Britain. Section 331 makes it an offense to advertise foreign gambling, which is defined as gambling that takes place either in a non-EEA state (including land-based casinos), or gambling by remote means that is not regulated by the gambling law of an EEA state, including Gibraltar. Regulations have also excluded white-listed jurisdictions.

The ban on the advertising of land-based foreign gambling, which had been exempted under the 1968 Gaming Act, and was apparently overlooked in the drafting of the 2005 Act, will be abolished. This will once again enable the advertisement of, for example, gambling resorts in Las Vegas, in Great Britain. Interestingly, it will also remove any doubt as to the legality of offering seats in Las Vegas poker tournaments as prizes in online poker tournaments.

Clause 3 makes amendments to Section 333 of the 2005 Act, which covers the territorial application of the ban on advertising of remote gambling. In line with the amendment made to Section 36, the test now requires that either at least one piece of remote gambling equipment is or will be situated in Great Britain, or where no such equipment will be situated there, but the facilities will be capable of being used there, with an exemption for EEA or white-listed jurisdictions. The ban on advertising remote gambling is therefore intended for, and will apply to, all remote gambling not covered by a U.K. license.

This draft bill has been long anticipated. It follows a review by the government and the Gambling Commission in 2009, which proposed that overseas gambling operators should be required to be licensed in Britain. This was then the preferred option in a consultation between March and June 2010, and the government’s approach was announced by the then-minister John Penrose, on July 14, 2011. It has therefore been known for some time that the government intended to require those supplying British customers and advertising in Britain to be licensed.

However, the wording of Clause 1 goes much further. Although the government’s own commentary refers to the clause as extending the territorial application, so that operators “providing” remote gambling facilities will require a license, the clause itself is considerably wider, applying to the provision of facilities for remote gambling if the facilities are “capable” of being used in Great Britain. It will therefore apply even where an operator neither targets British customers nor advertises in Britain. It will even apply to those operators who do not have a U.K.-specific website, or even an English language website. As presently drafted, exemption will only be gained if operators ensure that people located in Britain are specifically excluded from the site.

For the largest U.K. operators based currently in jurisdictions such as Alderney, Gibraltar, the Isle of Man and Malta, the principal effect will be increased costs. These will be primarily tax, currently 15 percent, which the government announced some time ago would be introduced by December 2014 on all U.K.-based online revenue. In addition, there will be the extra cost of regulation. For those non-British businesses currently supplying the U.K. from outside, who have not been the subject of U.K. regulation in the past, the licensing process will be more expensive and certainly more time-consuming.

The government has said that there will be a period of transition that will enable operators already licensed in EEA jurisdictions and in the current white-listed jurisdictions, being awarded an automatic provisional license, pending approval. That approval process will vary in the degree of scrutiny according to the jurisdiction in which the operator is regulated. So those in jurisdictions where regulators can provide the necessary compliance regulation will face less scrutiny than those whose regulators cannot provide such information. These operators will need to pay the compliance costs associated with being subject to the same requirements as other Gambling Commission licensees.

Rather optimistically, the government claims that the bill will not have any effect on public service manpower, on the basis that the commission is “adequately resourced” to enforce the extended scope of the regulatory regime. Whether any estimate of the number of potential applications has been made is not known, but the number of applications is likely to be substantial and, for a period at least, the commission will face a substantial number of, in some cases, complex applications. Without additional resources, the likelihood is that these will take many months to work through.

Timing
It is plainly the government’s intention that the bill will become law in time for it to be enforced by December 2014, but no indication has been given as to when the bill will first be presented to parliament. The parliamentary process is slow; on the other hand, this is a short, straightforward bill that is likely to receive all party support. However, the bill must be notified to the European Commission and the member states under the Technical Standards Direction. The government must then wait three months before adopting the new law. During that time, it is at least possible that operators may seek to challenge the proposed changes, which could spell substantial delay. It may therefore become law during 2013. It follows that those operators, particularly those not currently licensed in white-listed jurisdictions, should begin the application process sooner rather than later.

Footnotes
1 BBC Radio 4, Oct. 31, 2006.
2 “Remote gambling equipment” is defined as electronic or other equipment by or on behalf of the person providing facilities for remote gambling (a) to store information relating to a person’s participation in gambling, (b) to present to persons who are participating or who may participate in the gambling a virtual game, virtual race or other virtual event or process by reference to which the gambling is conducted, (c) to determine all or part of a result or obvious effect of a result or (d) to store information relating to a result.

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