Gambling Commission Consultation: Financial Penalties and Financial Key Event Reporting Introduction

Introduction 

The Gambling Commission (the “GC”) has opened a consultation on proposed changes relating to financial penalties and financial key event reporting. The proposed changes to financial penalties would be effected through a revised Statement of Principles for Determining Financial Penalties which would also be reflected in the Indicative Sanctions Guidance. In relation to financial key event reporting, the GC is proposing to change the relevant requirements through the Licence Conditions and Codes of Practice (LCCP).

Financial key event reporting: Reporting changes in ownership and interests

The GC is consulting on proposed changes to the LCCP (Licence Condition 15.2.1 - Reporting key events) and the addition of some new key reporting requirements to ensure that it is notified of changes to finances, “ownership and interests within gambling licensees at the appropriate levels”. The proposed changes to the LCCP would also be reflected in the Licensing, Compliance and Enforcement Policy Statement.

The proposals are intended to clarify and extend the key event reporting requirements. The GC wants to improve consistency across all licensees and reduce the current risk of gaps in the GC’s understanding of licensees’ financial positions and associations with others. In particular, the GC is concerned that gambling licensees are increasingly linked to “complex, modern day, global business structures meaning that the ownership and interests are not always clear” and “financing arrangements are not always straightforward”. 

The proposed amendments to the licence conditions would apply to all operating licences.

The Proposals

a) “Raising the reporting threshold for ‘operator status’ and ‘relevant persons and positions’ from 3% to 5%.”

Many gambling licensees are linked to jurisdictions where the ‘relevant persons and positions’ reporting requirements are at a threshold of 5%. In practice, the GC often already effectively waives the 3% threshold for some licensees by adding a specific alternative condition to their licences which sets the threshold at 5%.

As such, the GC is suggesting  raising the reporting threshold in Licence Conditions 15.2.1 and 15.2.2  from 3% to 5% to ensure consistency throughout the LCCP. Similarly, the GC proposes the same new threshold in paragraph 3.25 of the Licensing, Compliance and Enforcement Policy Statement relating to ‘Identity and Ownership’.

b) “Expanding the application of ‘relevant persons’ to include shareholders and other entities with both direct and indirect interests in the gambling licensee of 5% or more so that these are reported to the GC.”

Currently gambling licensees are not required to report information relating to shareholders or entities obtaining indirect interests in the gambling licensee (or its holding company) of between 3% and 10%.

By amending paragraph 2 of licence condition 15.2.1, the GC proposes to expand the requirement for gambling licensees to report changes to ‘relevant persons and positions’ so that it includes such shareholders or entities. The proposed wording also captures those having voting rights and/or entitlement to dividends or profits of 5% or more, as well as those who become a 5% or more beneficial owner (whether held directly or indirectly).
The onus would be on the licensees to obtain and provide information to the GC about those with indirect interests. The GC hopes this change would give it a better oversight of a licensee's associations and the beneficiaries of gambling profits. 

c) “Including the reporting of entering into financial agreements or arrangements with third parties and/or the receipt of financial assistance from a group.”

Currently the reporting requirements cover loans but do not cover other financial arrangements with persons who are not authorised by the FCA (and that can be used to introduce large amounts of money into the gambling licensee’s business, for example debentures, informal intra-group cash transfers for short-term working capital requirements, and payment by subsidiaries in foreign currencies on behalf of the gambling licensee). This means that the GC is currently unaware of when such arrangements occur and has no means of assessing the source of funds.

The GC is therefore  proposing to expand the wording of the key event relating to loans to require the gambling licensee to report any type of financial arrangement it enters into with any persons not authorised by the FCA. “Introducing a new requirement for gambling licensees to report details of individuals who acquire the equivalent of £50,000 or more worth of new shares in a rolling twelve-month period or entities that acquire the equivalent of £1 million worth or more of new shares in a rolling twelve-month period, along with the value of the acquisition and evidence of source of funds for that investment.”

There is currently no requirement for a gambling licensee to report the issue of new shares to the GC, when it does not create a new shareholder with an interest of 3% or more. Gambling licensees may be able to raise significant amounts of capital which is only identified to the GC when the GC is looking at a gambling licensee’s finances in relation to other matters. Large amounts of money may, therefore, be introduced into the gambling licensee for which the source of funds has not been checked. At present, the GC tests source of funds when a loan is reported under Licence Condition 15.2.1.3 and certain levels or conditions are met. This proposed new condition aligns the GC’s ability to test sources of funds that are being invested into gambling licensees through different routes. The GC’s expectation is that the source of funds evidence is gathered upfront as part of the share issuing process and should be reportable in the normal key event reporting timeframe.

The GC is therefore proposing reporting thresholds of £50,000 for individuals and £1 million for entities, but note that they specifically welcome views on this aspect of the consultation. This new requirement would be included in paragraph 3 of Licence Condition 15.2.1.
Again, the GC expect this proposal would facilitate a more complete, ongoing understanding of the monies entering the gambling industry with the benefit of reducing the risk of connection with crime and disorder.

Financial Penalties

Current Framework

Gambling licensees can be required to pay a financial penalty if, following an investigation, the GC find that a condition of the licence has been breached. The purpose of financial penalties, as set out by the GC, is to “protect the interests of consumers and the general public and uphold the licensing objectives”.  In imposing penalties, which the GC confirms should be set at a level where non-compliance is more costly than compliance, the GC aims to:

• change the behaviour of the Licensee;
• eliminate any financial gain or benefit from non-compliance with licence conditions; and
• deter future non-compliance of other operators.

The current process for determining financial penalties is set out in the GC’s Statement of Principles for Determining Financial Penalties (the “Statement”).  The Statement, which sets out the principles that will be applied when the GC is exercising its powers to impose a financial penalty, is produced in accordance with section 121(6) of the Gambling Act 2005.  It lists the circumstances where imposing a financial penalty may or may not be appropriate and sets out the criteria for determining the quantum of a financial penalty (the level of which is usually set by what the GC considers to be proportionate and reasonable).

The Statement was last updated in June 2017 and so many would say that a consultation on its substance is overdue. It is understood that the GC seeks to make the approach to financial penalties more transparent, the decision-making process much clearer, and to ensure that there is a consistent process used. This has been highly requested by operators, with 46% of licensees with cases between August 2021 and July 2023 asking for improved transparency in respect of the steps taken to calculate a financial penalty or challenging the quantum figure itself.  

The Proposals

The GC is proposing, subject to the outcome of the consultation, to make changes to the criteria for imposing a financial penalty and the methodology for determining the amount of a penalty as set out in the Statement. The GC has produced a draft amended version of the Statement (the “Draft Statement”), incorporating the proposed amendments, and explaining the reasoning behind the changes, as part of the consultation. This Draft Statement draws inspiration from the procedures for financial penalties used by the Financial Conduct Authority, Information Commissioners Office and Solicitors Regulation Authority.

The proposed changes aim to “ensure transparency, clarity and consistency on how penalties are calculated”. By making a clear link between the seriousness of the breach and the financial gain while in breach, the proposed changes are expected to result in financial penalties that are proportionate to the nature of the breach and the level of harm caused as a result of the breach.

The GC is also hoping that the proposed changes would make the decision-making processes clearer and therefore reduce the time and resources involved in determining financial penalties and mitigate the risk of legal challenges.

The key changes are as follows:

a) Setting out a clear and distinct six step process the GC would follow when determining a financial penalty

The GC is proposing to introduce a distinct six step process that sets out exactly the methodology and order the GC would follow when determining a financial penalty.  This would ensure that licensees “would be aware of and understand the methodology used by the Commission to determine each element of the penalty” and would be a change from the current process set out in the Statement, which only lists the factors that are considered without providing clarity on when and how they are considered.  Each of the 6 steps is set out below, alongside key points of interest:

• Step 1 – calculate the disgorgement element of the penalty (if appropriate)
  • As it stands, under the Statement, the GC is required to rely on estimates provided by the licensee as to their financial gain and the consumers’ detriment, when ascertaining the disgorgement amount.
  • The Draft Statement makes two amendments to this methodology:
    i) If there is no way to calculate an accurate detriment / gain figure, then no sum will be calculated under this step and a potential estimate will be factored into Step 2 when calculating the seriousness of the breach.
    ii) If it is possible to calculate an accurate divestment amount, then this is calculated at Step 1.
  • The Draft Statement identifies potential scenarios which would normally lead to an accurate figure, such as, where there is a quantifiable amount of misappropriated funds.
     
• Step 2 – determine the starting point for the penal element of the fine, in most cases by reference to seriousness and a percentage of GGY for the relevant breach period
  • The GC’s Draft Statement suggests that this step should consist of two separate and distinct stages.
    1. Step 2(a) – determining the seriousness of the breach, which involves the consideration of a non-exhaustive list of factors, such as, its nature, number of consumers impacted and the absence of controls to prevent the breach. The seriousness of the breach will then be categorised using a five-point scale. 
    2. Step 2(b) – determining the starting point of the penal element of the fine with reference to the operator’s gross gambling yield. Gross gambling yield during the period of the breach will (generally) be the base figure and the percentage to be applied to that figure will be calculated by reference to the five-point scale from Step 2(a). 
  • The table below is an extract from the Draft Statement and sets out the percentage ranges that will be considered by the GC for each level of seriousness.  The GC will use its judgement on a case-by-case basis to decide upon the appropriate percentage within that range. 

• Step 3 – consider aggravating and mitigating factors which may increase or decrease the penal element
  • Whilst the consideration of aggravating and mitigating factors is something that is already accounted for within the Statement, the GC aims to provide increased transparency and clarity on the types of factors considered and hopes to isolate the decision-making for each element or part-element of the fine. 
  • Aggravating factors might include a repeated breach or failure, circumstances being similar to previous cases or attempts to conceal relevant information or provide misleading information.
  • Mitigating factors might include the extent of steps taken to address or remedy the breach, early and voluntary reporting of the breaches or co-operation with the GC’s investigation.
• Step 4 – consider the need for a deterrence uplift to the penal element
  • This is designed to ensure non-compliance is more costly than compliance.
  • The GC proposes to separate out this step, which adjusts the level of fine for deterrence, from the other steps.
• Step 5 – consider any discount for early resolution
  • This step has been designed to encourage early notification to the GC of any breaches and to provide an incentive for co-operation.
  • The discount to the penal element for early resolution proposed is between 5% and 30%.
  • As with the previous steps, this discount is already part of the methodology used under the Statement but is considered at the same time as steps 1 – 4 and the GC is proposing to make it a completely distinct step. 
• Step 6 – consider any adjustment for affordability and proportionality
  • All the figures from Steps 1 to 5 will be added up, and this final figure will be reviewed to ensure that it is affordable. 
  • In order to “safeguard against serious financial hardship on behalf of the Licensee”, adjustments (taking into account the resources of any parent / group company) will be made to ensure that paying such a penalty will not impact on the solvency of the licensee.
  • The GC proposes to publish both the original and adjusted figure to ensure transparency.

b)  Clarity on the process to determine consumer detriment and/or financial gain by the licensee as a direct result of the breach, to form the ‘disgorgement’ element of the penalty – see ‘Step 1’

The current process in the Statement already includes a ‘disgorgement’ element, but with less clarity on how and when this element is applied. This ‘disgorgement’ element of the penalty would be calculated using the clear consumer detriment and/or financial gain by the operator that has resulted directly from the breach.  The proposals also provide clarity on how this element would be taken into account in situations where it is not possible to accurately identify this element of a financial penalty.

c) Clear separation of factors which would determine the seriousness of the breach, from aggravating or mitigating factors – see ‘Step 2’ and ‘Step 3’

The Statement lists a number of factors that are considered in the GC’s approach to determining financial penalties but does not distinguish between the importance of each of these factors, nor does it explain at what stage in the process they will be considered.

In the Draft Statement, the GC is seeking to clarify exactly what elements and factors are relevant at each stage of this six-step process in order to provide a consistent approach, and to reduce the risk of duplication or double counting of factors and provide transparency as to what matters have been considered by the GC at each stage of the methodology.

d) Transparency on how the GC would determine the level of seriousness of the breach – see ‘Step 2(a)’

In the Statement, the GC only explains that the seriousness of the breach will be considered but does not expand on the various circumstances that factor into this.  The Draft Statement introduces a new five-point scale that sets out in fairly granular detail the factors that may be indicative of a specific level of seriousness.

This reflects the approaches of the FCA and OFGEM which both use a five-point scale to categorise severity. The GC note that it is not possible to include all potential scenarios, however, it intends to include sufficient detail on the factors that they may consider, and which matters are indicative of particular levels of seriousness.

e) A proposed process for determining the starting point for the penal element of the penalty, calculated by reference to the seriousness of the breach and a percentage of gross gambling yield (GGY) generated during the period of the breach – see ‘Step 2(b)’

The Draft Statement proposes to use the level of seriousness to inform the starting point of the penal element of the fine.  The Draft Statement suggests that the gross gambling yield will be the base figure and that the seriousness will determine the percentage to be applied to that figure (up to a maximum of 15% for the most serious breaches).

f) A proposed process for situations involving multiple breaches during the period

The GC also explains that it is important to ensure that where multiple breaches have occurred, a proportionate approach is adopted.

This will be dealt with as part of assessing seriousness at ‘Step 2’.

1. Where multiple breaches have the same breach period, the GC proposes that the level of seriousness should be determined by taking a holistic assessment of the breaches.
2. Where there are multiple breach periods over varying dates the GC proposes that each distinct breach period is considered in isolation to assess the seriousness of breaches for that specific breach period. The level of seriousness for each identified period would be determined using a holistic assessment of the breaches present to determine the overall level of seriousness. Each identified period would then be added together to give an aggregated figure covering the whole period(s).

The aim of this change is to provide more clarity for licensees in relation to multiple breaches.

g) Clarity on how adjustments to the penalty would be made for aggravating factors, mitigating factors, deterrence and early resolution, distinct and separate from the process for determining the seriousness and starting point of the penalty – see ‘Step 3’, ‘Step 4’ and ‘Step 5’

The GC’s proposal to adopt a defined six step process to determine financial penalties aims to ensure a methodical and systematic approach for determining the final amount of the fine, considering a separate set of factors to determine each step of the composition of the fine: disgorgement, starting point for the penal element based on seriousness, any increase due to aggravating factors, any reduction for mitigating factors, any adjustment for a deterrent effect, and any reduction for early resolution.

h) Other

The final few sections of the Statement covers procedural matters, time limits and payments in lieu of financial penalties, all of which remain largely unchanged in the Draft Statement.

However, the GC does propose a new section covering payment plans in the Draft Statement.  The GC explains that there have been instances in the past where licensee requests to agree payment plans have been approved, and that this has led to protracted conversations and increased risk of the penalty not being paid in full. In order to avoid any issues arising out of payment plans, the Draft Statement explicitly states that the GC “will not accept payment plans unless there are exceptional circumstances which necessitate such an arrangement, and the Commission is satisfied that the arrangement will ensure the penalty will be paid in full”.

Next steps

Following consultation, the GC will analyse the responses alongside input from stakeholders and any additional evidence gathered during the consultation period to formulate their response(s). The consultation is set to close on 15 March 2024.

The GC anticipates (subject to the outcome of the consultation) that there will be a minimum of a three-month notice period between publishing the response and for proposed changes taking effect.