Risk based approach to online gambling regulation

With igaming regulatory landscapes shifting, Susan O’Leary, director of ecommerce at Alderney, speaks to iGaming Business about taking a risk based approach to regulation frameworks.

What is meant by a risk-based approach to online gambling regulation, and how does it differ to other licensing frameworks?
In short, a risk-based approach to regulation is where rules and regulations are applied to a sector in a practical way, only if required rather than a blanket obligation to conform even when they are not applicable or relevant.

Regulators and evaluation bodies such as The Financial Action Task Force (FATF) and Moneyval provide guidance on acceptable standards in various arenas, such as anti-money laundering and terrorist financing. FATF emphasises that the risk-based approach is central to the effective implementation of the FATF recommendations adopted in 2012.

It is impossible for operators to meet the criteria for every area that requires rules and guidance due to the wildly different standards they must abide by in the various regions in which they ply their trade. Taking a risk-based approach allows a level of practicality, but not all the world’s regulators can offer it with confidence. It requires a high level of experience and expertise only a few have. 

What are the main advantages of taking a risk-based approach? Is it a more efficient and effective way of ensuring firms are operating to the highest possible standards?
It is much more efficient for operators and service providers. They can advance their businesses in a safe and regulated environment, without getting tied in knots by over regulation. Businesses in the iGaming sector have struggled over the past 6 years to adjust to the differing approaches of newly formed local regulators.

There has been a lack of harmonization, no uniform approach to regulation via a common framework shared across multiple jurisdictions.

But as regulators gain more experience, this is slowly changing. Taking a risk-based approach – providing the assessors of the risk understand the risk in the first place – is by far the most effective and efficient way forwards for all parties. It has a knock-on effect with all stakeholders, particularly banks and payment processors who tend to loosen their constraints when they are comfortable with the levels of oversight in place.

Are there any specific challenges that come with taking this approach? If so, how are they best overcome?
You must really understand the sector you are applying the risk-based approach to, otherwise it can lead to absolute chaos. Alderney has always been a leader in the field of iGaming regulation, and it has taken more than 16 years to get our current framework in place. That is the level of experience required to take a risk-based approach.

Are there certain operators or suppliers whose businesses face greater risk? How do you ensure these businesses meet regulatory requirements under this model?
Of course. Take for example certain developing markets. Sometimes businesses want to enter a new market, but these markets may have come out of political and social turmoil.  Bribery and corruption may be commonplace and a standard way of doing business, some court systems may not be robust, and the country may or may not have AML or data protection processes in place.

There are many variables to consider. Sometimes with increased risk, there is increased reward; some call it the first mover advantage. In this scenario, businesses entering new markets quickly like to have a regulatory regime that helps them introduce best practices to help mitigate the risk to them and their customers.

But again, it requires a great deal of experience on behalf of the regulator to steer such operators and suppliers in the right direction.

For new and emerging markets, would you recommend they adopt a risk-based approach to regulation?
It will depend on the experience of the regulatory team in each new market. For regulators in new and pre-regulated markets, taking a risk-based approach straight out of the box may not be the best course of action unless they have gleaned previous experience in this sector.

A risk-based approach should only be applied once the relevant regulator has gained the necessary experience to do so.

Take for example the New Jersey Division of Gaming Enforcement, who consulted with Alderney prior to legalising and regulating iGaming in 2013; they set a very tough regime at the beginning while finding their feet. Now they understand things better they indicated publicly that they are moving to a risk-based approach and in general being far more flexible with how operators adhere to requirements.

This, of course, has helped the market expand year over year, and shows the potential risk-based regulation has to grow markets quickly and sustainably.

Here in Alderney we have been working with operators, governmental and regulatory bodies in all corners of the world for a number of years now where there is little or no regulatory regime in place to date in these developing markets, to help them build the necessary experience for the benefit of the industry as a whole. 

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Sweden: will igaming regulation impact investment in leading Nordic market? (Paywall)
UK regulatory waters will require careful navigation in 2017 (paywall)
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