Regulation: 5 defining events

iGB’s legal editor Steve Ketteley and his team at Wiggin LLP mark the magazine’s milestone 100th issue with a look back at the main legal and regulatory developments since its launch back in 2002.

1. UIGEA – Stephen Ketteley
The passage of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) in October 2006 was, possibly, the most seismic regulatory event to impact the online gambling industry in its relatively brief history. The early 2000’s had seen an explosion in the provision of online gambling services and the spate of initial public offerings, particularly in London. 2004 and 2005 represented an almost hysterical appetite for the sector by an array of professional service providers, private equity interests and banks.

The risks to US-facing operators were starkly explained in the IPO Prospectus published by PartyGaming in mid-2005 where, in the risk factors, the market was told: “The US Department of Justice considers that companies offering online gaming to US residents are in violation of existing US federal laws”. In theory, it should not have been a huge surprise to participants in the market when the DoJ decided that enough was enough. In reality, it was something of a bolt-out-of-the blue when legislation that was designed to cut gambling operators off from their payment flows was tagged on to a bill largely designed to deal with port security in the US – such a bill was always going through and the very late attachment of the UIGEA demonstrated just how extraordinary US politics can be.

A number of leading operators at the time with US-facing activity including PartyGaming, 888 and SportingBet were all forced to exit the market, almost immediately, and an array of London-listed US-facing operators and their service providers, in effect, had to close down. Many of those still survive in one guise or another, retreating to their Caribbean homes whilst the three aforementioned operators had to cope with losing as much as 90% of their customers within the space of the two weeks it took President Bush to sign the bill into law.

If anything, UIGEA showed how resilient and adaptable the online gambling industry is, which has served it well as it has faced subsequent regulatory challenges and will, almost certainly, face more to come. It is notable that GVC (which now owns Sportingbet and PartyGaming) has just passed muster with the New Jersey regulator.

2. The emergence of the regulated market – Stephen Ketteley
Prior to the 2010 World Cup, the only jurisdictions in which a gambling operator could locate servers legally were the established “offshore” licence hubs, as well as the UK and Italy. Some six years on, the majority of European jurisdictions have some form of regulation in place (albeit not all of it EU-compliant). Major operators may now have a variety of licences within their business, with each having their own regulatory and compliance requirements and nuances that serve to impose cost and complication on what are, in fact, relatively straightforward businesses.

Yet possibly the most notable consequence of the march towards regulation was the corresponding need for the industry to mature and evolve, moving “onshore” with the corresponding application and potential enforcement of an array of local advertising regulations, privacy regulations, anti-money laundering regulations.

However, the regulated markets are not for everyone, as they have not developed as we all hoped. Regulated markets continue to frustrate the industry’s commercial intentions by imposing marketing restrictions, product restrictions, onerous technical requirements and high tax burdens. The gambling industry has a history of risk-taking with the law and is used to building businesses with a risk appetite in mind. The advent of the regulated market has led to a polarisation in the industry with those that are willing to maintain significant unregulated revenues and those that prefer to pursue a regulatedrevenue strategy instead.

One possibly unforeseen consequence of regulation has been a recent trend towards a return to unregulated markets for almost all operators as they have found the cost and impact of regulated markets too much. They have seen other operators continue, successfully, to derive bulky revenues from “grey” markets. We have also seen with the British Gambling Commission and then the DGE in New Jersey, leading regulators publicly accepting that well-regulated operators can, with proper consideration, make money in unregulated markets and still be considered “suitable”. It will be interesting to see where regulation takes the industry in the next 10 years and how, if at all, that position evolves.

3. The march towards consolidation – David McLeish
The last two years have seen the most frenetic ever period of high-end M&A activity in the online gambling industry.

North American companies led the charge in the summer of 2014 through the multibillion dollar combinations of Amaya/Pokerstars, GTECH/IGT and Scientific Games/Bally. Over the last 18 months, leading European gambling operators have got in on the act with the acquisitions of Sky Bet by CVC and Jackpotjoy by Intertain, together with the high profile mergers of Ladbrokes/Gala Coral, Betfair/Paddy Power and GVC/Bwin.Party.

Operators and suppliers alike have been increasingly drawn to M&A activity because of the evolving challenges facing the online gambling sector, including:
• The competitive landscape having driven up the costs of player acquisition (including marketing) and retention;

• The patchwork of international gambling regulation, especially the shift from .com to .local, forcing even the largest operators to focus their operational capability and marketing firepower on fewer jurisdictions.;

• The introduction of new gambling taxes in regulating and existing regulated markets (such the UK’s point-of-consumption tax) threatening to challenge margins;

• Having to deal with the challenges of AML, data protection and responsible gambling legislation, where the full impact is yet to be felt.

Industry participants have concluded that scale achieved through acquisition and streamlining of costs is the best way to overcome these hurdles and to maintain, and hopefully grow, margins. Ironically, it is the growing maturity  of the online sector that has created the challenges mentioned above but which has also unlocked the funding needed for the bigger transactions. The resilience of the sector’s financial performance has corporate financiers, private equity house and lending banks more keen than ever to broker and fund deals.

The proposed merger of Rank and 888 and their joint unsuccessful approach to William Hill shows that there is no let up in the march towards consolidation involving major industry participants. Over and above these deals, strategic investments and bolton acquisitions at a lower level continue to have a significant cumulative impact and will inevitably go some way to creating the mega merger participants of the future.

4. The evolution of wagering – Patrick Rennie
Over the years, video games have become more and more sophisticated. Games today contain their own currencies, digital commodities, and real-time interaction between players. Moreover, players can (and do) also compete at video games, known as eSports.

Perhaps inevitably, the features outlined above have led to questions around wagering (and gaming) in respect of videogames. In fact, in August the Gambling Commission published a discussion paper on virtual currencies, eSports and social gaming.1 The topics discussed by the Gambling Commission include: (i) eSports being offered on markets by existing bookmakers; (ii) players wagering on themselves; and (iii) ‘skin’ betting. It appears the Commission considers the line between games and gaming has become too blurred.

In relation to markets being offered by bookmakers on eSports, eSports presents similar risks to standard sports (such as cheating and match-fixing), but regulating these risks is likely to prove to be very challenging. Match-fixing scandals still plague many sports today despite the presence of strict rules imposed by sporting authorities, TV coverage and replays. It is easy to imagine the struggle in regulating a non-professional player who is competing from their own living room rather than in front of millions of people.

Section 13 of the Gambling Act 2005 defines a betting intermediary as a person who provides a service designed to facilitate the making or acceptance of bets between others. Where players wager on themselves to beat another player at a video game, the Gambling Commission has highlighted that those companies and websites offering such an arrangement may be classed as a betting intermediary and, if so, would need a licence to do so.

The final topic is the issue of ‘skinbetting’, namely where a player wagers digital commodities – such as aesthetic improvements to an in-game weapon or vehicle (a ‘skin’) – purchased or earned with a video game. This wagering could theoretically take place within the video game environment, but there are also websites where players can transfer, wager and exchange ‘skins’ based on the outcome of games. The recent high profile example of action taken against Valve’s CS:GO offering only further highlights the issue.

In all, the topic of video games and wagering is only going to become more commonplace and it will be important for any operator, website or video game publisher involved in wagering on video games or involved in eSports to consider the application of the UK and international gambling legislation and whether or not their activity is licensable.

5. The ECJ and EU Law – Jason Chess
EU law has delivered a lot for the industry. Take Germany. How a nation as disciplined and organised as Germany can so comprehensively botch up its gambling legislation, with so many good models to copy from, is a mystery. However it doesn’t matter. As long as German domestic law rides roughshod over the fundamentals of Community Law, operators know that they are safe from its clutches and can offer product into the jurisdiction. Indeed, the German situation is far more favourable than many of the so-called ‘regulated markets’ because operators don’t have to face an unfavourable legalised monopoly (like those in Scandinavia) or a crippling rate of tax (France, Portugal and soon-to-be Netherlands) which has gained the approval of the Commission or the ECJ and passed into enforceable domestic law. One would rather a shambles with carte blanche to trade under a sensible MGA or Gibraltar licence courtesy of Article 56.

Which brings us on to the not-so-good side of EU law. Both the ECJ and the EC have been weak and hesitant in clamping down on member state regulatory regimes which are obviously objectionable. Belgium, for example, not only mandates an unlawful land-based nexus but takes strident steps to enforce its controversial regime. Even ARJEL understands that the French model is broken, but no political will exists to fix it. An exorbitant level of duty may take the Netherlands the same way.

EC scrutiny has picked up of late but it is still too little far too late, and what ECJ judgments there are take as their starting assumption that online gambling is a pernicious and dangerous activity – an un-evidenced assertion that contradicts the static (at worst) problem stats in many countries and skews the proportionality test far too far in favour of the monopoly with a fig leaf attached, and far too far against the free movement of services.