Gambling Commission consultation on the Licensing, compliance and enforcement policy statement: Proposed changes to licensing
Expert Insight provided by Bahar Alaeddini, Partner, Harris Hagan

On 17 November 2021, the Gambling Commission launched a consultation proposing changes to its Licensing, compliance and enforcement policy (the “Consultation”), including changes to:

  • set out its position on products that appear to require dual regulation;

  • clarify certain operating and personal licence requirements;

  • its regulatory toolkit following its pilot use of Special Measures; and

  • its process on licence review, interim suspension, and Regulatory Settlement.

What is the Licensing, compliance and enforcement Policy?
The Licensing, compliance and enforcement under the Gambling Act 2005: policy statement (the “Policy”) builds on the Gambling Commission’s Statement of principles for licensing and regulation(the “Statement of Principles”).  These important policy documents underpin every aspect of the licensing lifecycle of a licensee as they set out the principles that the Gambling Commission will apply in exercising its functions under the Gambling Act 2005 and how it will comply with its duty, under section 22, to promote the licensing objectives. 

As the title of the document suggests, the Policy is split into sections that deal with licensing, compliance and enforcement separately.  Given the number of wide-ranging and significant proposals jam-packed into the Consultation we will publish two blogs.  This is the first blog, which covers proposed changes to licensing.

Dual regulation products
The Gambling Commission has been working with the Financial Conduct Authority (the “FCA”) to “finalise” its regulatory approach to products that contain financial elements and should, therefore, be regulated by the FCA.  The Consultation makes clear the Gambling Commission’s “preferred outcome is that this is resolved through legislative change, but this is unlikely to happen before the current Gambling Act Review is concluded.” 

In the absence of legislative change, the Gambling Commission proposes to set out its “clear policy position” that:

  • applications that it considers contain an element that should be regulated by the FCA “are likely to be refused”, although, this will not affect existing licensees already dual licensed; and

  • this includes “products whose name, branding, marketing or game rules contain language associated with financial products such as “stock”, “share”, “index” or “investment” risk harming the second and third licensing objectives, because they may give the impression that they are in the nature of a valuable investment rather than a gambling product.”

These proposals no doubt follow the collapse of Football Index earlier this year and the embarrassing role the Gambling Commission played in it.  The independent report into the regulation of BetIndex, the providers of Football Index, dated 13 September 2021, found that:

  • the two regulators had been interacting since May 2019 on whether all or part of Football Index should be regulated by the FCA rather than by the Gambling Commission and those discussions remained unresolved in March 2021; and

  • the Memorandum of Understanding between the two regulators was “an appropriate and proactive step to address the issues that arose in relation to BetIndex”; however, needed to be strengthened to avoid the “stalemate” and “differing understandings of the same events” that occurred between the Gambling Commission and the FCA.

The independent review led to a strengthened Memorandum of Understanding to improve co-operation between the two regulators and found that:

In the first instance, BetIndex did not properly notify the Gambling Commission of the nature of the product in its licence application, nor did it inform the regulator of changes to the product after launch as it was required to.

The Gambling Commission could have better responded to the challenges that the novel product raised once launched, with earlier scrutiny, including of the language used by the product, quicker decision-making and action, and better escalation of issues.

Complete applications
The Gambling Commission expects all applications to be complete when submitted.  Its well-established policy is to reject incomplete applications, and, from June 2021, refunds are no longer given for incomplete applications.  It remains an applicant’s responsibility to ensure their application is “complete” and provides “all relevant information” at the time of submission.  Despite this, the Gambling Commission continues to receive incomplete applications which “omit necessary information and supporting evidence required” and “request or expect a refund of their application fee”. 

The Gambling Commission proposes to set out its “established policy position for clarity” as follows (new wording in bold): 

If an application is incomplete or information to support the application is missing or not provided upon request then, depending on the individual circumstances the Commission may:

  1. reject the application as incomplete;
  2. seek further information;
  3. determine the application based on theinformation the Commission has available to it.  This may affect the decision on whether a licence can be granted.

The application fee is payable on submission of the application.  The Commission will not refund the application fee where an application is rejected for any reason, including where the application is rejected as incomplete.

This emphasises the critical importance of submitting full and proper licence applications, and the need to work with specialist lawyers when preparing and submitting licence applications, including variation and change of corporate control applications submitted by existing licensees.

Relevant persons
As part of the Gambling Commission’s assessment of an application, it will consider the suitability of “persons considered relevant to the application.”  Section 3.10 of the Policy currently states:

3.10 In considering operating licence applications the Commission will include assessment of the suitability of those persons considered relevant to the application. The persons considered relevant may vary depending on the information provided in the operating licence application and on company structure, but are likely to exercise a function in connection with, or to have an interest in, the licensed activities.

The Gambling Commission proposes to provide greater clarity about persons who may be considered relevant to an application by including further examples, by adding the following sentence to the end of paragraph 3.10:

It may also include shadow directors, persons or other entities who are controllers of the applicant and/or those who are its ultimate beneficial owners.

This proposed change highlights the importance of applicants and licensees ensuring their stakeholders – especially the owners of the business and those funding it – understand the relevant gambling legal, regulatory and licensing requirements of being licensed in Great Britain, the Gambling Commission’s assessment process, and its wide discretion to request any information it considers relevant.

No definition is provided in the Consultation, or elsewhere by the Gambling Commission, for the meaning of “ultimate beneficial owner”.  This is unhelpful (and in breach of the Regulators’ Code) because, to date, few jurisdictions have defined beneficial ownership, its scope or threshold.  Furthermore, jurisdictional definitions tend to differ from the anti-money laundering definition which is based on FTAF principles.  

Use of the licence within a reasonable period

The Statement of Principles provides:

3.9 The Commission will not issue licences to people who do not need them. If a licence is issued but an operator or individual does not provide facilities for gambling in reliance on that licence within a reasonable period, the Commission may commence a licence review with a view to revoking the licence if that appears necessary.

3.10 The Commission may grant licences (particularly remote gambling licences) subject to a condition that requires an operator to begin to offer facilities for gambling within a specified timescale.

The Gambling Commission proposes to reinforce this position by adding mirror wording in the Policy, which will read as follows:

In considering operating and personal licence applications, the Commission will include assessment of whether an operati[ng] licence applicant is likely to provide facilities for gambling within a reasonable period or a personal licence applicant is likely to be employed in a role that requires a personal licence within a reasonable period.

If a licence is not used within a “reasonable period” – another term that remains undefined – the Gambling Commission will seek to revoke it following a section 116 review, unless it is surrendered.  

Perhaps unintentionally, likely due to clumsy drafting, the proposed wording suggests that a personal licence holder needs to be employed.  Although, in our experience, this has been the Gambling Commission’s strong preference due to a person’s vested interest in, and ability to be disciplined by, their employer, it has accepted circumstances where a person is a third party to the gambling business.

The principle of suitability underpins every aspect of the Gambling Commission’s work.  It expects applicants to be open and to co-operate in supplying the information it needs to assess an application for a licence. The Gambling Commission proposes “to make it clearer to applicants how [it] consider[s] the suitability of the applicant and make it explicit that [it] will look beyond the applicant entity.”  These changes are being made because some applicants do not fully understand how each element of suitability is considered and the requirement to look beyond the applicant when assessing suitability, and requests for further information are “sometimes met with resistance”, causing delays and application refusals. 

Most of the proposed changes relating to suitability are being made at paragraph 3.11 of the Policy, which will read as follows:

3.11 When considering the suitability of an applicant the Commission will look beyond the applicant itself and may for example consider those connected with the applicant, such as:

  • persons relevant to an application by reason of their being likely to exercise a function in connection with, or to have an interest in, the licensed activities;
  • shadow directors;
  • persons or other entities who are controllers of the applicant;
  • ultimate beneficial owners. 

In respect of the applicant and others connected with the applicant the Commission has regard to the following elements and seeks evidence to support and enable an assessment to be made against each one:

  • Identity and ownership – This includes the applicant’s transparency in relation to the beneficial ownership of the applicant and those who finance and profit from its operation.
  • Finances – For operating licences this will include the resources likely to be available to carry out the licensed activities and the legitimacy of the source of the capital and revenue finance of the operation.
  • Integrity – Honesty and trustworthiness. Willingness to comply with regulatory responsibilities, uphold the licensing objectives and work cooperatively with the Commission.
  • Competence – Experience, expertise, qualifications, and history of the applicant and/or person(s) relevant to the application. Ability to comply with regulatory responsibilities, uphold the licensing objectives and work cooperatively with the Commission. 
  • Criminality – criminal record of the applicant and/or person(s) relevant to the application.

Paragraph 3.22 is being updated to clarify that where shares are held on a nominee basis, the “true owners” will need to be identified.

The proposed changes broadly match our experience submitting and managing applications on behalf of our clients, and therefore formalises the Gambling Commission’s existing approach.  In recent years, applications have had a much sharper focus on source of funding in relation to both funding arrangements and ownership, although the Gambling Commission believes this is due to increasingly complex ownership structures.  Often, detailed investigations are conducted by forensics accountants.  Applicants and licensees should take heed of these proposals to ensure they, and in turn their key stakeholders (i.e. direct and indirect shareholders, other owners and lenders), understand the regulator’s focus to minimise the risk of refusal or revocation.

Financing arrangements
As mentioned above, the finances of the applicant/licensee, and “connected persons”, form a key aspect of the suitability assessment.  This includes “being satisfied that the business will not be financed by the proceeds of crime, nor will its profits be used to finance criminal activity.”  The Gambling Commission states that this position is implicit, which accords with our experience; however, it wants to make it explicit as it regularly receives applications that “do not include full and open information as to the source of funding for the operation, nor full and frank information about all those relevant persons connected to an applicant.”  This resistance delays determination of an application and can result in refusal.

The Consultation proposes to add the following two new paragraphs:

The Commission will not grant an operating licence until it is fully satisfied that the operation will not be financed by the proceeds of crime and that profits from the operation will not be used to finance criminal activity. To that end, applicants will be asked to provide information and evidence as required both as to the source of finance of the proposed operation and as to the identity of those connected to the applicant as specified in paragraph 3.11 above.

As stated above, the Commission will also wish to be satisfied as to the sources of the applicant’s finance to satisfy itself that such funds are not tainted by illegality.

Updating the Gambling Commission
The Gambling Commission wants to add examples of the types of changes and matters that are important for a licensee to monitor and report because of the potential impact of non-compliance.

The Consultation proposes to update paragraph 3.46 as follows:

Once a licence has been granted and issued, it is important that licensees read through it to check that the details on the licence are correct and that they are familiar with the conditions attached to the licence. Licensees should also be aware of the changes and matters they must keep the Commission informed of whilst they are the holder of a licence. Failure to do so may result in regulatory action being taken. This includes, but is not restricted to:

  • Changes in ownership/control

  • Submission of timely and accurate regulatory returns

  • Submission of timely variation application if a licensee is likely to exceed the fee category limit of its licence 

It is essential that licensees consult the LCCP to understand their reporting requirements, including what types of changes in ownership/control are reportable as key or other reportable events.

Respond to the Consultation
The Consultation closes on 9 February 2022.  Responses can be submitted here.