Rewarding high value customers through VIP programs is taut with commercial and regulatory tension
Insight provided by Paul Newson, Principal, Senet Advisory

The maxim that industry and the public interest are best served by regulators that can effectively navigate the natural tension between advancing commercial outcomes and preventing and minimising harm, underpins my thinking and approach to regulatory policy and practice.

In my experience industry sustainability and capacity to innovate are assisted by sophisticated and formidable regulators that act strategically and possess specialist understanding of the sector. This specialist knowledge is supported by ongoing stakeholder dialogue, and married with intense curiosity about industry issues, challenges, and opportunities. This should not mean light handed regulation or imperil the independence of the regulator.

Conversely effective industry supervision involves rigorous assurance activities marshalled towards the greatest risks, supported by escalating intervention in response to the nature and extent of any non-compliance identified. Maintenance of public confidence and regulatory legitimacy requires that wilful, repeat, and serious misconduct is stridently denounced, and consequences reflect the seriousness of the wrongdoing.

The challenge for industry in advancing commercial objectives while satisfying regulatory obligations and preventing and minimising gambling harm is no less complex or onerous. This task is exacerbated where the regulatory framework is outdated, blunt or unduly ambiguous or where the regulator is timid, disengaged or lacks specialist capability.

This description of regulatory settings and challenges is an apt introduction to the disquiet concerning the operation of VIP rewards programs and associated political noise and escalating regulatory scrutiny in some jurisdictions.

The starting point for this discussion is that VIP rewards programs are legitimate tools to recognise and reward customer loyalty and provide a differentiated and more bespoke service to higher spending players. Such programs are common in commercial endeavours and customers that can afford to spend more, expect a differentiated and superior level of service. However, in contrast with other commercial activities the risk of gambling harm and devastating costs problem gambling incurs on impacted individuals and families presents additional complexity and challenge.

Many gambling regulatory frameworks recognise rewards programs as lawful and legitimate tools to incentivise customer spend and loyalty, however, they can aggravate the risk of gambling harm if not designed and implemented effectively including board approval and oversight. It is instructive to observe that there has been a dearth of guidance on designing and implementing VIP rewards programs that effectively manage the tension between rewarding high value customers and ensuring effective responsible gambling safeguards.
Two recent reports published in the United Kingdom have examined the complex issues surrounding rewards programs also known as ‘High Value Customer’ schemes and adopted opposing positions on the appropriate way forward. The report from the Gambling Related Harm All Party Parliamentary Group (APPG) on Online Gambling Harm recommended:

“A ban on all VIP schemes and inducements. These schemes are highly profitable for gambling companies offering very high stakes gambling and they continue to lead to significant harm.” 

The Gambling Harm – Time for Action report by the House of Lords Select Committee on the Social and Economic Impact of the Gambling Industry, fixed on affordability as central to its approach and findings. The House of Lords report recommended additional licence conditions for operators including affordability and source of funds checks prior to new customers being admitted to a High Value Customer scheme and participants are to be at least 25 years old.

The House of Lords report grapples with common issues and complexity as the APPG report, however, its findings diverge from the more prohibition inclined APPG recommendations. The House of Lords report adopts a more measured approach, making 50 recommendations to help address gambling related harms. The House of Lords observation in the introduction to chapter 1, about the desired impact of its recommendations, demonstrates a sophisticated and pragmatic approach and supports heighted regulation and supervision over misconceived proscription:

We hope that our recommendations will make gambling safer for all, but no less enjoyable for those who do participate safely.

On 30 September 2020, following extensive stakeholder consultation, the UK Gambling Commission published new guidance for High Value Customer schemes with Neil McArthur, Gambling Commission CEO stating:

“We have introduced these new rules to stamp out malpractice in the management of ‘VIP’ customers and to make gambling safer. Our enforcement work has identified too many cases of misconduct in the management of VIP schemes and this is the last chance for operators to show they can operate such schemes appropriately.”

The guidance imposes strict standards and provides a form of safe harbour for operators, minimum standards to guide the design, implementation, and ongoing oversight of High Value Customer schemes. Analogous to the preference for an assertive robust regulator, regulatory guidance is a tremendous tool to assist operators meet obligations and leverage leading practice. It is also preferable to the muddy waters that can occur where guidance is limited, and the regulators posture is unclear. This may enable and amplify conduct that realises short term commercial objectives, but without effective oversight or bold industry leadership, incidents of malpractice will surface and exacerbate community disquiet, until an adverse events triggers a government response and the prospect of blunt regulatory intervention.

It is also instructive to observe the confluence of responsible gambling and anti-money laundering obligations contained in the new licence conditions. The regimes might have different objectives, but on one view they share similar indicia alerting to potential issues. Additionally, the principles underpinning AML compliance in risk-based regimes, correlate remarkably well with the focus on affordability and sustainability to advance safer gambling outcomes. The UK regime is well placed to harness the interaction between AML and gambling regulation, principally because the Commission is the designated Supervisory Authority for casinos under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

Analogous to financial accountability regimes and associated enhancements to banking executive’s accountability, the Commission also requires operators to appoint a senior executive with responsibility for oversight of its High Value Customer scheme. This is a sensible measure which ensures direct lines of accountability and should help ensure better implementation and monitoring and assist board and regulatory oversight.

The Commission’s guidance imposes substantial obligations on industry and its messaging is unambiguous. It expects to see significant improvements in operator performance otherwise it advises it will be compelled to ban High Value Customer schemes.

Irrespective of your preferred policy position towards VIP rewards programs, the recent UK Gambling Commission’s guidance provides a circuit breaker and redirects the conversation away from banning and towards enhanced regulation and enforcement. This provides operators the opportunity to adapt and enhance their High Value Customer schemes to better navigate the tension between commercial objectives and safer gambling outcomes.

While the intense political focus on gambling harm underlying the two reports, and the Gambling Commission’s intervention targeting High Value Customer schemes is UK centric, lessons arising from this complex matter are universally relevant.

Relative to the UK experience, the Australian regulatory environment is complicated by the separation of gambling and anti-money laundering regulation between state and territory gambling regulators and the federal anti-money laundering and counter-terrorism financing regulator AUSTRAC. While this separation presents some challenges, the principles contained in the UK Gambling Commission’s High Value Customer scheme guidance remain relevant to Australian operators.

Regulatory settings and approaches will differ between each state and territory; however, VIP rewards programs are a common feature offered by gambling operators in Australia. It is relevant to observe that there has been one high profile disciplinary complaint in NSW against a registered club[1], which alleged the operator had engaged in conduct, involving the operation of a VIP rewards program, that encouraged, or was likely to encourage, the misuse and abuse of gambling activities.

While there has been a dearth of guidance on the design and operation of VIP rewards programs in Australia, the increased focus and regulatory intervention heightens the importance for operators to review existing practices, leverage available guidance, and where appropriate seek specialist advice. It is essential that VIP rewards programs effectively balance rewarding player loyalty and providing superior service for customers that can afford to gamble more, with rigorous protections that advance responsible gambling and prevent and minimise gambling harm.