Footing the bill: are operators paying for the UKGC’s regulatory shortcomings?

As millions of UK commuters can tell you, January usually brings with it an inflation of monthly rail fares, which is a bitter pill to swallow for those returning to work after the Christmas break. The public are expected to pay more for travel on the grounds that rail infrastructure requires more funding to keep it going. Every year, the same debate occurs but eventually commuters pay the extra costs and carry on with the rat race. February has seen the UK Gambling Commission (UKGC) unveil similar proposals to increase licence and application fees for licensed operators by double digits. The online sector could potentially see a 55% increase, if the UKGC’s consultation ambitions are realised. According to the regulator, the increase will enable it to continue to recover its costs and respond to new challenges. The challenges cited in the consultation include responding to technological changes, the changes in the market and increasing risk from the black market. In addition, the UKGC has plans to upskill its staff and increase operational scope. However, the UKGC has faced criticism over the last two years from diverse political and social groups, the most damning of which claimed it had an “unacceptably weak” understanding of gambling-related harm. In December, Conservative MP Iain Duncan Smith called for the body to be scrapped all together in the forthcoming Gambling Act 2005 review. So, is it worth paying an extra 55% to fund a regulator whose trains are never on time, so to speak? Below, EGR asks the industry’s leading legal experts.

Clifton Davies director David Clifton

As a starting point, it must be accepted that, to regulate effectively, the Gambling Commission requires sufficient funding to satisfactorily fulfil its regulatory duties. The DCMS consultation is not short on detail in terms of justifications for increasing the Commission’s fees. That said, both the scale and timing of the increased fee proposals do raise the following questions: Coming less than four years since the last fee changes (in April 2017) saw fee reductions for 1,900 licence holders, no change in fees for 1,000 and increased fees for just 75, integrated within a plan for the Commission to draw on its reserves, did someone get the fee calculations or strategic forward-thinking wrong back then? Given that one of the Commission’s justifications for the very considerably increased fees is “the need to maintain public confidence in regulation”, is its intended recruitment drive for more specialist staff influenced by the harsh criticisms levelled against it last year by four different parliamentary bodies (and the accompanying adverse media reports) and, if so, is it fair that the cost of this should be borne by licence holders? Another justification is the challenge created by changes in the size and shape of the market partially caused by consolidation. Given that GGY is the basis for nearly all of the Commission’s fee categories, to what extent has consolidation reduced its overall fee income? Very notably, a further justification cites “increasing risks associated with unlicensed operators and the need to protect consumers and the industry from ‘black-market’ encroachment”. How does the Commission reconcile this risk assessment with its chief executive’s comment a fortnight earlier that the industry has exaggerated the impact of the illegal market? With knowledge that, as part of its review of the Gambling Act 2005, the government is considering whether there is a case for enabling a more flexible approach to setting fees (including, for example, the scope for financial incentives to operator compliance), did the Commission give any thought to this before, seemingly, dismissing it from its fee proposals?

Northridge Law partner Melanie Ellis

The Gambling Commission has become increasingly stretched financially and in the last financial year the gap between the cost of regulation and licence fee income was £1.3m, or around 6%. Some fee increases are clearly justified, but annual fee increases ranging from 15% to 72% and application fees increasing by 60% are very surprising. To some extent the fee income needs to be future proofed, but the review of the gambling act, which kicks off this year, will consider funding for the Commission, so these revised fees may only be in place for the next two to three years. Three key justifications are given for the large fee increases, but a general theme emerges of the Commission needing to invest in staff and systems to respond to new product types and technological developments. This does reflect my own experience representing clients with new or complex gambling products; a regulator with a better understanding of these products and how the law applies to them would in many cases reduce the overall costs to the operators involved.

The proposed fees would give the Commission around an additional £7m per year from 2022 and it is difficult to understand how meeting the challenges it sets out will cost so much – Melanie Ellis, Northridge Law

However, it is surprising to see increased costs of dealing with the black market given as one of the justifications for increasing fees. The Commission downplayed the impact of the black market just two weeks ago and, in any event, it seems unfair to expect licensed operators to bear the cost of enforcement action against those who are not subject to the same compliance costs. The proposed fees would give the Commission around an additional £7m per year from 2022 and it is difficult to understand how meeting the challenges it sets out will cost so much. The reality is that, in recent years, political and media pressure has compelled the Commission to provide a much higher level of regulatory oversight, which inevitably comes at a cost.

Keystone Law partner Richard Williams

While it is clear that the Commission is underfunded and is currently drawing on its reserves to plug its funding shortfall, the proposed increases are incredibly high, particularly for online operators. In order to make up an anticipated income shortfall of £3m in 2023-2024, the Commission is proposing to increase annual fees for remote casino, bingo, betting and software licence holders by 55% from October 2021. Non-remote operators will be hit with a rise of 15% from October 2020. In addition, all licence application fees will go up by 60% from October 2021, including the fee payable when applying for change of corporate control approval and for a licence variation. These are quite astronomical increases – how would we react if our councils announced that due to budget shortfalls, our council tax would go up by 60%?

These are quite astronomical increases – how would we react if our Councils announced that due to budget shortfalls, our Council tax would go up by 60%? – Richard Williams, Keystone Law

While I acknowledge that the Commission has to remain adequately funded to be effective, the scale of these increases is huge. Increased application fees will undoubtedly deter operators from entering the GB market and will add to the relentless increases in tax and compliance costs of operating a gambling business in Great Britain. Some licence fees are already too expensive in my view. For example, change of corporate control applications are already very costly when a party acquires just 10%+ of a licensed operator. Similarly, the fees for software licences are already high when there is little enforcement involved for a pure B2B operator. I wonder whether these proposals are a first shot across the bows, on the basis that any lower increase will be less than what was originally proposed. Operators must respond and highlight aspects of the current fees regulations that are currently unfair and how these massive increases will impact their business.

GBGC CEO Warwick Bartlett

Fixed fees are a problem for the smaller operators because they are not proportionate to revenue. I have always argued that the fees should be progressive so that the larger, most profitable operators shoulder the highest burden. However, is such an increase in income necessary in the first place? The fines levied on operators, which run into millions, are either passed on to gambling charities or the treasury. Surely during these difficult times caused by Covid-19 that has led to betting shops being closed, sports being cancelled, and a substantial loss of income, the Gambling Commission should be cutting its own cloth to fit its income. We read in the financial press only this weekend that the chancellor is considering widespread increases in taxation. This will inevitably take money out of the economy, so now is not the time to increase fees.