Insights Gambling Commission Consultation on Financial Key Event Reporting – One step forward and…

On Friday the Gambling Commission released its latest consultation proposals – see here. The consultation which may have gone under the radar relates to licensees needing to report on changes to ownership and funding.

As a reminder, licensees are required to report when a person or entity becomes a holder (directly or indirectly) of 3% or more of its shares. This is not to be confused with a requirement for a person holding (directly or indirectly) a controlling interest in a licensee (effectively 10% or more of shares or voting power) to be approved as suitable by the Commission pursuant to a change of corporate control application process.

Starting with the good news, the Commission is proposing to change the 3% threshold to 5% – the latter is more commonly used by gambling regulators in other jurisdictions and the Commission has increasingly had to accept it (in particular from listed companies) and notes that “many gambling licensees are now linked to jurisdictions where the governance arrangements mean that some licensees cannot meet the 3% shareholder reporting requirement because they cannot access information about shareholdings below this level.” So far so good.

However, the Commission is also looking to introduce a new requirement for licensees to report, in each case by reference to a rolling twelve-month period, details of individuals who acquire the equivalent of £50,000 or more worth of new shares (i.e. through subscription rather than a purchase of existing shares)  or entities that acquire the equivalent of £1 million or more worth of new shares, along with the value of the acquisition and evidence of source of funds for that investment.

At present there is no requirement for a licensee to report to the Commission the issuance of new shares when it does not create a new shareholder with an interest of 3% or more. The rationale in introducing this new requirement is to provide the Commission with greater visibility over funds that flow into licensees from shareholders, which is the case when new shares are acquired through share issue but not necessarily the case when shares are acquired from existing shareholders.

Related to the above, the Commission points out that it already makes enquiries around source of funds in connection with loans made available to licensed entities from non-FCA licensed entities (which are separately reportable). The Commission is therefore proposing to, in effect, widen the reporting obligation to cover monies received by a licensee through both equity and non-equity funding. For example, this would cover financing received from a parent company which itself had raised money (including through its own share issues).

It’s worth emphasising – as touched on above – that the proposed reporting obligation only attaches to ‘new’ shares. As such, existing shares in a licensee may continue to be traded without any need to notify the Commission unless and until the acquirer of those existing shares reach the current 3% (or proposed 5%) and 10% thresholds. Of course, and by way of example, existing shares may be traded on the open market for sums well in excess of the proposed £50,000 and £1 million figures that apply to funding raised by a licensee through the issue of new shares (regardless of the relative shareholding % interest in the licensee). The Commission seemingly takes the view that because the licensee does not receive monies from trades of existing shares, it will reserve its position to require notification of the identity of those entities and individuals at the 3% (or proposed 5%) threshold and to likewise assess suitability at the existing 10% mark.

On the one hand, the Commission clearly considers that there is a gap that needs to be closed to ensure it can meet its licensing objectives around keeping crime out of gambling and, in reality, licensees should have processes in place to ensure that they understand the provenance of funding they receive (albeit the challenge of monitoring investments over a 12 month rolling period will be an unwelcome one which risks highlighting any disconnect between company secretarial and compliance personnel).

On the other hand, the Commission’s existing approach to source of funds on change of control applications has at times had a flavour of seeking to follow water uphill – in case work we have seen highly sophisticated funds explain that the Commission is already taking a deeper dive than any financial services regulator they have experienced. The £50,000 and £1 million thresholds seem low and do not take into account the commercial reality that institutional and high net worth investors are unlikely to welcome the prospect of divulging significant financial information for what, to them, is a tiny investment.

The Commission has found it increasingly difficult on change of control applications to keep to its own stated timetable. Widening the net in terms of its source of funds checks through these proposals is going to necessitate further resources and, ideally, a more risk-based approach than has been seen to date.

We would recommend that licensees (particularly those familiar with complex ownership and funding structures), respond to this consultation. The deadline to do so is 15 March 2024.