A blueprint for success

Developing a flourishing gambling jurisdiction that leads the world both from an economic and regulatory perspective is the dream for gambling regulators. But for many, the journey to this regulatory nirvana often takes decades and can fail under the strain of overregulation and illegality.

Most gambling regulators start out as products of circumstances rather than design, with governmental legislation creating specific requirements for each regulator based on its own individual market rather than the individual market determining the legislation and regulations used to govern it. But what if you undertook the process the other way around?  How would a market-centric legislative and regulatory process create a well-regulated market? Would it work? Or is effective regulation a product of circumstances rather than design?

But what makes an effective regulator? David Clifton, director of Clifton Davies Consultants, believes it comes down to how you define effective. “If it is effective in terms of pushing licence holders to strive to achieve the highest possible standards, the UK’s Gambling Commission presently wins hands down. If it is effective in terms of commanding respect, I would suggest that currently pole position is held jointly by New Jersey and Nevada in the US.”

For Warwick Bartlett of consultancy firm GBGC, the most effective regulators are offshore regulators as they can more keenly appreciate the contribution gambling businesses make to their economy. Bartlett adds: “They are tough in dealing with malpractice. They are not a push over, but they are sympathetic to not damaging the industry.” While this may be a combination of many factors, such as the growth of new technologies or a historic gambling base and effective governmental input, the importance starting out on the right foot in this process cannot be understated.

Legislation

An effective regulator begins with one thing: legislation. Well-written legislation can make a market great, while badly written, ambiguous legislation can render it unworkable for both regulators and operators alike. In most cases, the most receptive jurisdiction for gaming legislation is one with a single central authority rather than individual provinces/states.

As many jurisdictions around the world have found, having two different sets of legislation, such as central government gaming legislation as well as local province/state gaming legislation can create issues when attempting effective regulation in both areas. There are many reasons for this, most notably the disparity between local government requirements and central government rules.

Other factors in this include a lack of knowledge by local politicians when compared to their government counterparts, lack of resources available to explore issues related to gaming, and the potential that outside entities will influence the debate. However, having a central government drafting and imposing gaming legislation does not remove this issue entirely, as governments are still collections of diverse groups with individual opinions, but the issue becomes a national one instead.

Classifying gambling from a legal standpoint is difficult because it relies on absolutes. The most widely used frame of reference by legislators in this debate is the game of chance. This is a wide definition which enables legislators to address games individually, allowing the adding of new gaming strands without significant legislative amendment. As a concept, the game of chance is an essential component for any effective legislatory position.

As many jurisdictions have found, the setting of proportionate, well-calculated taxation rates can make or break a jurisdiction. Prohibitive taxation discourage operators, channelising citizens into unregulated gambling, while too low taxes will not provide the jurisdiction with the revenues it requires to be effective, and could lead to overriding anti-gambling sentiments holding sway. Ideal taxation rates fall somewhere in the middle, establishing clear benefits for both parties.

Legislatory governance sets out the roles and rules by which an effective gambling market is run. Creating clearly defined roles for each stakeholder gives a jurisdiction certainty, because everyone – regulators, licensees and government departments ­– knows their place in the wider jurisdiction. After this process has been completed, the government’s role can shift to one of creating the regulatory authority to oversee all forms of gaming authorised under the legislation.

Regulation

The creation of a regulatory entity to govern the conduct of gambling can be a difficult process, principally because of the sheer number of entities involved in the gambling industry. Additionally, there’s an implied dearth between the knowledge of the individuals involved and the knowledge required to regulate the industry effectively.

Most regulators at their inception will start with several core principles, which serve to define its regulatory approach, governing things including consumer protection, preventing the spread of crime in the gambling industry and, latterly, the prevention of problem gambling amongst players. In these ways, they make a clear statement about the sort of regulator they are likely to be and set in stone the standards by which they will be judged.

For Clifton, it is important to bear in mind the need to reduce the burdens on business created by regulatory systems. A crucial part in this, he explains, is the 2005 Hampton Report principle that “regulators should recognise that a key element of their activity will be to allow, or even encourage, economic progress and only to intervene when there is a clear case for protection”.

A regulator beginning life is like an individual starting their first job. At the beginning their knowledge will be limited but as they move forward they will gain an understanding of both the procedures that they are required to adhere to, and the wider industry they exist in. In the regulation of gambling, expanding regulatory knowledge primarily takes place in two distinct areas: experience-based learning and exchanging knowledge with other industry stakeholders.

The most widely used method of knowledge exchange between operator and regulator manifests itself in the form of the consultation. In the European gambling industry consultations allow regulators to solicit opinions on pending legislation without being partisan towards one operator. However, consultations rely on the positive will of the industry to contribute to the debate, and without responses from a multitude of sources, industry-motivated change will always be the result of just a few big players.

As a way of decreasing the likelihood of this and improving the knowledge base of any regulatory entity, individuals currently working within all corners of the gambling industry could be drafted in to consult for the regulator on issues affecting the market. In this way, the regulator gleans vital information about the industry from the individuals working at the sharp end, making their job easier.

However, for Clifton, it’s not necessarily essential for regulatory staff to come from an industry background, but to gain a full understanding of how the industry works as quickly as possible. “Too often in the past, operators have complained that gambling regulators’ staff ‘do not get it’.” He believes that such criticism “is less prevalent in the case of more ‘entrepreneurial’ regulators, such as those in the likes of the Isle of Man, Alderney, Gibraltar and Malta” where the gaming ecosystems are less insular and more outward facing.

The role the industry plays in the regulatory process will always come under public scrutiny, especially given the ever-increasing role that gambling plays in the lives of citizens. A good example of this is the recent backlash against operators over the proliferation of gambling ads in the UK and subsequent tightening of advertising standards by the Gambling Commission as evidence of this relationship.

For any truly impartial regulator, independence from the industry it serves is a must. However, as regulators in South Australia found, having an independent authority doesn’t necessarily mean that it will be an effective authority. Bartlett believes that a good regulator must not be antagonistic toward the industry it regulates because gambling is a business like any other. “Gambling businesses employ taxpayers, the same as any other industry and these taxpayers all make a contribution to the overall economy of a jurisdiction. They would not be able to make this contribution in a regulatory environment where gambling businesses are restricted unnecessarily.”

However, for Clifton, the key to any successful relationship between operator and regulator are two things: collaboration and respect. “A good regulator should also respect those of its licensed operators who maintain the highest regulatory standards and who strive to obey the rules. And It should be willing to collaborate with them to develop best practice for the benefit of the industry as a whole.”

Bartlett believes that the relationship between regulator and operator must be one thing: symbiotic. “They should both see each other’s point of view and understand that gambling can be an economic good that provides income for government and fun for the players.”

Activities

As a regulator establishes itself, the focus splits into two distinct parts: developing a licensing regime by which operators can exercise gambling-related activities and developing codes of practice for those operators who have already been licensed by the regulator. Complicated licence applications, together with a high licence fee, can discourage operators from submitting applications but in most cases, operators cannot afford to ignore or dismiss markets because of complexity or cost. For every business which does not enter a market because of these issues, there will always be a competitor that will.

The development of a licensing regime can be a torturous process for the uninitiated regulator as they seek to respond to the demands of operators keen to exploit newly regulated games and markets as some regulators in the US have found with sports betting. But for every regulator that has an issue with licensing, there are many others whose initial licensing processes run smoothly.

When fully established, the licensing aspect of regulation shifts into developing licence models which adapt to the introduction of new technologies and new gaming strands into the gambling industry. Knowledge exchange between operator and regulator can serve as a vital tool in the introduction of new technologies into the gambling industry, but for Bartlett it’s vital not to smother innovation by overregulating it: “Stifling innovation prevents an industry from evolving.

“We must remember that the gambling industry grew rapidly –  adopting technology that has since become the norm in other areas of life. The challenge now for regulators is to ensure that their knowledge base keeps up with the newer technologies which come into gambling. One such area is cryptocurrency, where some regulators have understood the tech involved very early, but others have not. Another good example is loot boxes, where regulators are only now beginning to get their knowledge base up to scratch.”

Regulators must also increase their knowledge of new regulations and statutes being introduced, although this often comes through the medium of in-house training rather than direct interaction with operators. On the more negative side of the operator/regulator relationship, regulators use fines and penalty packages to exercise regulatory objectives, with varied results, as Clifton explains: “Experience in the UK has shown that small-scale fines imposed by the Gambling Commission do not necessarily work. It is the shock value of the bigger fines that have really made operators wake up properly to the risks they face for non-compliance.”

As we have established, the best regulators have strong core principles and procedures, understand the industry that they regulate and consistently adapt their approach to change. In addition, at all times they are underpinned by simple, effective and constantly changing legislation, which mirrors this approach to change. The two have a symbiotic relationship; an effective regulator works better with simple, well-written legislation that enables a market’s evolution, while legislation works best when a regulator motivates the industry which it regulates.

One of the best examples of this is the world’s most successful market, the UK, which generates £4.7bn of gross gambling yield and is one of the most effectively regulated markets, but the UK Gambling Commission is by no means a perfect regulator. It must constantly learn and change practices, and if the evidence of the last year is anything to go by, this process will continue for some time to come.