The Gambling Commission (the “Commission”) opened a consultation on high value customers (“HVCs”) in June, which closed in the middle of August.  We have considered the issues raised by this in previous posts.

The Commission has now published its Consultation Response and the updated Industry Guidance (the “Guidance”), compliance with which will now form part of operators’ regulatory obligations.

In the executive summary to the Consultation Response, the Commission eloquently sets out its objective:-

“[We have] found too many examples where licensees have assumed a customer to have a high disposable income or time to spend on gambling without licensees taking the necessary action to confirm whether that is the case. We have found too many instances where HVCs have been identified by reference to their commercial value to a licensee, and those customers being provided with enhanced customer service based only on the amount they spend. HVC schemes often have a dedicated team of staff responsible for managing these customers and it is common for them to be offered benefits, including personalised incentives, gifts, hospitality, and preferential service, due to their high spend.”

It should be remembered that the Consultation took place with a backdrop of the APPG’s recommendation that VIP schemes be banned entirely, in contrast to the House of Lords’ recommendation that “licence conditions for gambling operators should be amended to require them to undertake a thorough affordability and source of funds check before admitting any new customer to a VIP scheme”.  That backdrop is important to remember as the industry can expect significant scrutiny in the coming weeks from those seeking to ban these schemes entirely.  Currently, the Commission has followed the House of Lords’ approach rather than that of the APPG and decided to allow these schemes to continue but with a “high level of regulation around them”.

In the Consultation Response, the Commission clearly states it is:

“only prepared to allow HVC schemes to continue provided they are offered in a manner which is demonstrably consistent with the licencing objectives.  Where licensees cannot apply effective controls including effective due diligence, senior oversight, clear accountability and the culture of responsibility around these schemes, they should not be operating them”. 

As predicted, we have ended up with Guidance which is almost identical to the draft guidance published as part of the Consultation itself.  We always detect a degree of irritation in the industry that the Commission can seem simply unwilling to entertain any suggested changes to any draft amendments to the LCCP on which it may be consulting at any given time.  For those that do lament about an alleged pointlessness of consultation processes, they may feel that this is an example of such.

As can be seen from a comparison of the Guidance as against the draft guidance, relatively little changed and amendments were more clarificatory rather than anything substantial.

Notable changes include-

• Allowing consumers who had previously self-excluded to subsequently be considered as eligible for participation in an HVC scheme. Clearly, there is a lot of protective regulation around such circumstances and such a player will be considered to be of high risk, one would think, throughout any subsequent relationship with that operator and require a significant amount of attention if they are to participate in such a scheme;
• The Guidance clarifying that it is not intended “to capture ad-hoc, non-personalised bonus offers or promotions that are made available to large numbers of consumers”. Rather, the guidance is designed to capture “schemes that offer tailored or personalised incentives linked to high value spend and/or frequency of play”.  There had been a concern that the bonusing or incentives meted out to customer bases generally could be caught up in the bureaucracy around HVC schemes. The Commission has clarified that is not the intention;
• The Commission emphasising that “source of funds checks should provide clarification over the actual source of the funds used to gamble rather than an open source assessment of potential income/wealth”. There is perhaps much more to this than meets the eye and this is discussed below.

There are some interesting aspects of the Guidance and the Commission’s Consultation Response that warrant further comment.  We would always recommend that operators pay close attention to the Consultation Response itself as it can provide useful background to the wording that has flowed into the Guidance.

The role of wider stakeholders

As we have commented before, we endorse the role that experts by experience (“EBEs”) play in the evolution of gambling regulation.  It is our firm view that the legislature and the regulator need to listen to the experience of all consumers, generally, but those that have suffered significant harm as a consequence of their interaction with gambling operators have a valuable contribution.  We have also previously commented on the anonymity of the EBE group that the Commission interact with and which has a very clear influence on the regulatory debate, particularly with access to the ears of the APPG constituent MPs.  Whilst that anonymity remains, it is nevertheless notable that certain individuals who are very clearly participants in that group remain very visible and very vocal on social media. They have made it clear how they feel about the Commission’s adoption of the House of Lords recommendation as opposed to the prohibition endorsed by APPG.

With that in mind, it is notable that in the Consultation Response yesterday, the Commission stated:-

“The interim Experts by Experience group considered the risk of harm associated with HVC schemes too great and strongly favoured a blanket on HVC schemes to all consumers.  We understand the nature of the panel’s concerns, based in part on personal experiences.  We share the concerns of EBE about the risks of HVC schemes but, consistent with the principal of proportionate regulation, considered those risks can be mitigated by new stringent safeguards”.

We welcome the reference to “proportionate regulations” and firmly believe the critical importance of that approach in not only the upcoming consultation on affordability, which the Commission yesterday announced is imminent, but also in the wider upcoming review of gambling regulation and legislation.

What will industry response be, in light of the Commission’s approach?

With the aforementioned backdrop of other vocal groups clearly disputing the Commission’s approach to HVC schemes, we do envisage significant attention to these in the coming months.  The Commission has only given the industry until 31 October to implement the industry guidance.  Furthermore, the Commission has stated that “unless significant improvements are made, it is likely that the Commission will have no choice but to ban such schemes”.

Linked to that, in a salve, of sorts, to the EBE group and others, the Commission has made it clear that “if licensees cannot put in place the necessary safeguards, they should not run HVC schemes.  Should a business be found to have misapplied the guidance or use HVC schemes to exploit vulnerable consumers, they will be subject to regulatory action.  This may include, but not be limited to restrictions placed upon individual licensees that will prohibit the offering of HVC schemes…or fines or licence revocation.

Given the political backdrop, the Commission’s threatening position on this is understandable.  The regulator has taken a succession of blows in the APPG and the House of Lords enquiries and so needs to be seen to be acting quickly and with authority.

It may therefore be somewhat surprising in light of the Commission’s clear threat that operators will be subject to regulatory action “should they be found to have misapplied the guidance”, that the Commission refused to publish a “checklist of measures that needed to be implemented with guidance used and form the development of good practice and staff training”.  In responding to that request and rejecting it, the Commission continues to follow its philosophy of an “outcome-based approach [to] avoid a prescriptive one size fits all regulatory requirement”.  The Commission “considers that the provision of a checklist or prescriptive set of procedures intended to cover all scenarios and business models would be counter-productive”.

What are we to make of this approach?

On the one hand one could heavily criticise the Commission for refusing to take what might be considered to be a reasonable step and consolidate a 20-page Consultation Response and a 7-page industry guidance note into something more digestible and precise.  It is hard to believe that the Commission, internally, will not have such checklists themselves to assist with their compliance work.

On the other hand, one could take the view that operators are sophisticated businesses and should be able to take what is in fact very detailed guidance and commentary and distil it down into their own workable policies and procedures that must be designed to meet the objective of the regulations.  One might argue that the Guidance really just amalgamates a number of other existing regulatory requirements around consumer protection, affordability, governance etc and one might argue that the industry should be able to look after itself and not be spoon-fed.

A quick turnaround

The requirement to implement the Guidance within a month has raised some eyebrows.  It is interesting to compare it with, say the formal guidance on customer interaction which came into force in October 2019 and which had been published in July 2019, giving the industry a number of months to update their policies and procedures in order to comply.

The Commission’s argument is the industry should really be doing much of this already and that the draft HVC guidance has been in circulation now for a couple of months.  That rings a little hollow when you compare it with the previous approach on customer interaction, which also built on previous obligations and just provided more detail around how they should be met.

Furthermore, one does question the procedural propriety of the regulator’s comment that operators should have limited time to comply with guidance that flows from a consultation on the basis that they have had access to the draft guidance as part of the consultation.  That would seem to suggest that the Commission have in effect made their mind up prior to the consultation and expect operators to begin their work at that point, rather than once the final, consulted guidance has been issued.

That aside, it is our view that much of what is being required by the industry guidance is, actually, a repetition of existing requirements and the industry does now need to just simply get on with the work to ensure that it is complying by 31 October.  It is very clear that the Commission will come back to the industry quickly after that date to understand how they have complied and will expect a decent response if any particular operator is going to be allowed to continue with its HVC scheme going forward.

Oversight and accountability

This element of the Guidance is possibly the most worrying for certain senior individuals within certain (but by no means all) operators and may well be where the Commission’s focus may be going forward.  The Personal Management Licence concept was largely ignored by the Commission in its enforcement processes until the last couple of years. We have now seen it become standard for PML holders to face the music alongside their employers for any regulatory failings.

With HVC schemes, the Commission is focusing its attention on senior management in how they ensure that the risks to consumers are mitigated and one can expect the attention particularly to be on the PML for marketing and the PML for compliance.  It is not uncommon for the Commission to focus on what has historically been a tense relationship between marketing teams and compliance teams within gambling operators.  Over the years, the power, if that is the correct term, within organisations has clearly shifted somewhat from the marketing teams to the compliance teams as the consequences of regulatory failings become greater and greater every day.

Here, we have an overt threat from the regulator that where HVC schemes do not comply, there will be personal responsibility and it can be expected that the marketing and the compliance leads may well find themselves jointly responsible.  This raises some interesting governance challenges for operators who are going to really need to focus on how the marketing and compliance teams interact with one another, how the marketing teams are overseen by compliance, how they are audited and how those at board level can ensure they have visibility that the internal relationships are working as they should be.

Knowing your customer

When the HVC consultation was published, we noted that the draft guidance stated “licensees should be taking steps to ensure all customers are gambling with money they can afford to lose (lawfully acquired disposable income)”.

It is notable in the Consultation Response that respondents had “suggested that relying on source of funds checks for admittance to HVC schemes risked alienating customers whose spend fell significantly below the AML threshold and would not ordinarily have prompted AML concerns”.

In response to this the Commission “notes the concern that source of funds, ordinarily prompted by AML concerns, may currently be conducted at a higher threshold than is typically required to qualify for HVC incentives.  However, we consider these checks justifiable given the unique arrangements made to incentivise HVCs to spend at significantly higher levels than the wider customer base.  HVCs present a heightened risk due to their levels of engagement by frequency, spend, or both.  Undertaking source of funds checks on this group is therefore consistent with a risk-based approach.  Source of funds checks should provide clarification of the actual source of the funds used to gamble rather than an open source assessment of potential income/wealth”.

It is worth dissecting this.

The Commission has, in this statement, unilaterally applied a “high-risk category to HVC scheme participants”. It is not entirely clear if this is high-risk in AML terms, gambling-related harm terms, or both.

If “high-risk” refers to AML, it seems awkward regulation to simply decree all HVCs as a high AML risk.  The Commission’s own AML Risk Assessment does not identify HVC status, itself, to be a higher risk for AML purposes. It would seem the consequence of the Commission’s Guidance that operators must treat HVCs as a high AML risk by default. If that is right, the effect is a requirement to treat an HVC in the same (or similar) way that a casino operator is required to treat an identified PEP, or a family member or known close associate of a PEP, where the Commission already requires that such operators take appropriate measures to establish the source of funds (and source of wealth) involved in any business relationship with such persons.

It does not necessarily follow that a customer who is of heightened risk of harm due to frequency or even level of spend is necessarily a high-risk customer from the perspective of money laundering. While HVCs may exhibit higher risk behaviours from an AML perspective (e.g. higher levels of spend), it must surely remain open to operators to determine whether an HVC necessarily presents a higher AML risk. The Commission acknowledge that “source of funds, ordinarily prompted by AML concerns, may currently be conducted at a higher threshold than is typically required to qualify for HVC incentives”. And yet the Commission does not say why an HVC customer, being the recipient of a tailored service, presents a money laundering risk that warrants attention at a lower threshold than a player who spends the same sum of money but who doesn’t opt to receive that same, tailored service.

If the “high-risk” refers to gambling-related harm, the Commission seem to have conflated responsible gambling and money laundering requirements, which is indicative of a theme we have seen from the Commission in the recent months.  In order for a customer to participate in an HVC scheme, the Commission is clear of the requirement to have undertaken a source of funds check and obtained specific evidence/information to support their resulting conclusion. Operators will not be permitted to reach their conclusion based on assumptions they may otherwise make on the basis of open-source information.

Whichever risk the Commission considers to be “high” in HVC schemes, in order to mitigate that risk, the industry is being required to determine the source of the actual funds that are used to gamble rather than make an individual customer risk assessment. Some may consider that, in so doing, the Commission effectively requires that operators must adopt a risk-free approach to HVC schemes, rather than risk-based, which is the price that operators seemingly must pay for their continuance.

What next

It will be interesting to see how the industry responds to the Guidance.  We know that many of the large operators’ HVC schemes have been significantly re-shaped in recent years as part of AML and social responsibility initiatives and it may be that a number of operators consider the risks of such schemes to outweigh the diminishing commercial benefit.

For those that take a different approach and decide that commercial enterprises should be in a position to offer certain regular, valuable customers with a different level of service than their general customer base, then they will need to spend a lot of time and effort over the coming month to make sure that they are in a position to respond to the Commission should they come knocking in November.

There will be a lot of political and media pressure on the Commission to ensure that the industry is complying with the Guidance and, at a time when the industry is already spending a lot of time and effort trying to address the affordability conundrum, internal questions of priority and focus will need to happen in the coming days and weeks.

The mood music is not in the industry’s favour at the moment and the threat by the regulator to ban HVC schemes entirely is a real one that should be taken seriously.  The industry has the opportunity to ensure a ban does not happen, but it does not have long to do so.

The Consultation Response can be accessed here.

The Guidance can be accessed here.

A comparison of the draft guidance with the final Guidance can be accessed here.