UK: The Affordability Debate (2): Ambiguous Regulatory Requirements

Following the closure of the Gambling Commission's (the "Commission") consultation Remote customer interaction – Consultation and Call for Evidence (the "Consultation"), on 9 February 2021, which yielded some 13,000 responses, we are now in the midst of an 'affordability debate'. However, this debate is largely focused on the future, to the detriment of the present. At a time when licensees are proactively striving to improve their standards and prioritising their approach to safer gambling, it is apparent that licensees are unsure as to precisely what they need to do to remain compliant with present Commission affordability requirements, what those requirements are, and where they are specified.

Tim Miller, in his speech at the CMS Conference in March 2021, stated that "the process of giving detailed consideration to all the evidence is still ongoing with extensive further work and engagement likely to be needed."  Mr Miller went on to state that "clarifying existing rules will be our immediate priority in any next steps." What Mr Miller does not say, however, is when that will be and what is going to happen in the interim.

A cynic may say that this lack of clarity operates to the benefit of the Commission in its pursuit of its affordability objectives as outlined in the Consultation. Two consequences are clear. Firstly, there are signs that the Commission is subjecting licensees to a series of requirements, none of which are clearly set out in licence conditions, codes of practice, or formal guidance issued by the Commission under its statutory remit.

Secondly, licensees concerned to ensure that they adhere to the Commission's expectations are likely to interpret the limited formal guidance on affordability cautiously; many in our experience even taking into account the Consultation itself. This can only be to the advancement of the Commission's affordability objectives. We will deal in a later article with the impact of this precipitate action by the Commission on the Consultation and the Gambling Review.

Current position

Despite what some licensees may have experienced when engaging with the Commission, the measures proposed in the Consultation are not in force. The Commission's present requirements are instead spread across its last two annual enforcement reports and one formal guidance document, in addition to its published regulatory sanctions and/or settlements.

The Commission takes the view that its enforcement reports serve as indicators to licensees of its expectations, for which licensees can be held to account; these reports therefore arguably contain policy positions that, if enforced, are more akin to licence conditions or code provisions. We have discussed previously our concerns that the Commission may be making indirect changes to licence conditions and/or code provisions through its introduction of requirements to adhere to guidance and this is perhaps another, somewhat broader, example of the same.

We do not agree that the enforcement reports carry the weight of formal guidance. It is clear from the content of the licence conditions and codes of practice ("LCCP") that in cases where the Commission expects licensees to adhere to formal guidance, it says so. Social Responsibility Code Provisions 2.1 (anti-money laundering – casino) and 3.4 (customer interaction) are examples of the Commission explicitly requiring licensees to adhere to, or take into account, specific formal guidance, the latter requiring that licensees take into account the Commission's formal guidance on customer interaction. Nowhere in the LCCP is there any reference to the enforcement reports carrying such weight: the closest the Commission comes to this is in licence condition 12.1.1 (3) which, solely in relation to licensees' obligation to ensure they have appropriate policies, procedures and controls to prevent money laundering and terrorist financing, requires that they:

Putting aside the breadth by which this statement may be interpreted, it is clear that this obligation relates to anti-money laundering and not directly to safer gambling or affordability. This appears to be the cause for ambiguity in this area; an evolution of affordability from its apparent origins as a money laundering concern – historically some licensees' customers having been identified as having gambled with criminal spend – to it now being central to the Commission's expectations from a safer gambling perspective.

This is further evident from a consideration of the Commission's introduction to its section on affordability in Raising Standards for Consumers – Enforcement report 2018-19 (the "Enforcement Report 2019") where it states:

The obligation, as outlined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, that licensees who hold casino operating licences obtain evidence of source of funds and source of wealth on a risk-based approach in order to mitigate money laundering risks will of course extend to their consideration of affordability. However, this should be as a risk factor that may, when subjectively assessed, increase the risk of money laundering and the financing of terrorism and trigger further enquiries. It is not at present a requirement at a certain level of spend.

When affordability is considered solely from a safer gambling perspective, a formal requirement to obtain evidence of affordability is impossible to identify and the Commission's expectations are ambiguous at best, even more so given our contention that the enforcement reports may not operate as formal guidance on this matter. How then, is it reasonable for the Commission to hold licensees to account for failings in this area?

1. Enforcement Report 2019

The Enforcement Report 2019 outlines various open-source data sources that may help licensees to "assess affordability for its GB customer base and improve its risk assessment and customer interventions." This data focusses largely on Office of National Statistics (ONS) and YouGov data highlighting average annual salary and monthly personal disposable income. The report goes on to state that:

It is of note that there is no recommendation in the Enforcement Report 2019 that licensees should obtain evidence of affordability from customers whose losses reach national average incomes. As we have discussed above, this requirement, it seems, comes from the Commission's interpretation of money laundering legislation and certain licensees' obligations to obtain, on a risk-based approach, evidence of source of funds and source of wealth. Rather, the Enforcement Report 2019 focusses on disposable income data being used to set "benchmark triggers" as a starting point for engagement.

2. Customer interaction – formal guidance for remote/premises based gambling operators – July 2019 (the "CI Guidance")

When describing the Commission's expectations as to how licensees must identify customers who may be at risk of experiencing harms associated with gambling, the CI Guidance refers to affordability and states:

"Operators should aim to identify those experiencing or at risk of harm and intervene to try to reduce harm at the earliest opportunity. Reliance on deposit or loss thresholds that are set too high will result in failing to detect some customers who may be experiencing significant harms associated with their gambling. It is therefore imperative that threshold levels are set appropriately.

Open source data exists which can help operators assess affordability for their GB customer base and improve their risk assessment for customer interactions. Thresholds should be realistic, based on average available income for your customers. This should include Office of National Statistics publications on levels of household income."

Again, as with the Enforcement Report 2019, there is no suggestion in the CI Guidance that licensees should be obtaining evidence of affordability from customers whose losses reach national averages, rather it suggests that affordability is a factor that should be considered when developing customer interaction policies and aiming to identify customers who may be experiencing or at risk of experiencing harm. There is a significant difference between "[intervening] to try to reduce harm at the earliest opportunity" and requiring customers to produce extensive evidence to justify their level of spend when they reach a threshold.

3. Raising standards for consumers – Compliance and Enforcement report 2019-20 (the "Enforcement Report 2020")

The Enforcement Report 2020 was published three days after the Consultation – a decision that will not have helped licensees to understand what is, and what is not, required. In referring to the recommendations it made in the Enforcement Report 2019, and considering customers who have "demonstrated gambling related harm indicators and been able to continue to gamble without effective engagement", the Commission states:

The Enforcement Report 2020 goes on to outline various open source data sources that can help licensees to "assess affordability for GB customers and improve [its] risk assessment and customer inventions". Again, the data presented primarily focusses on average annual salary as outlined in the ONS survey of Hours and Earnings. The Commission goes on to state that:

Importantly, outside of the Consultation, this is the first occasion on which the Commission makes any reference to licensees requiring customers to provide information or evidence  in relation to affordability. This time, suggesting evidence is required only when customers wish to "spend more than the national average". The obvious question here, and a conundrum which we know licensees have been struggling with, is "to what national average does the Commission refer?"

There is a significant difference between the national average salary (stated as c£30,500) and average weekly gross earnings (stated as c£585.00). Should customers be evidencing affordability for losses exceeding £585 per week, or for losses exceeding £30,000 per year; or is there another average that is relevant?  

What is expected now?

In his Speech at the CMS Conference in March 2021, Tim Miller suggested in that he did not expect the Commission to be announcing its plans on affordability imminently. Mr Miller also stated:

Some of the handpicked examples in the enforcement reports demonstrate what almost all would agree are, without evidence of affordability, "clearly unacceptable levels of gambling", for example a customer losing £187,000 in two days with no regular source of income. However, other examples of which we are aware are not so straightforward and are certainly not at, on any reasonable interpretation, "clearly unacceptable levels". This is, in practice, most certainly a grey area. The consequence is that licensees who have prioritised safer gambling and, due to their misunderstanding of the Commission's expectations, are at best criticised, or at worst subjected to regulatory action, because of a failure to meet those expectations in relation to affordability.

Since the publication of the Consultation, we have heard of licensees being criticised during compliance assessments for failing to obtain evidence of affordability from customers who have exhibited no clear signs of problem gambling, are at a low risk of harm, have never raised any concerns themselves, and who have informed licensees that they are comfortable with their gambling spend. This is not to say that licensees should not adhere to the CI Guidance and conduct customer interactions with these customers when and if they reach internally identified thresholds. It is also not to say that licensees should not take affordability into account and discuss the same with customers; but when are they required to evidence affordability?

Ambiguity inevitably leads to inconsistencies. Can "benchmark triggers" or "trigger groups" roll over and/or reset monthly/annually or are they expected to be final? Spend of say £60,000 presents very differently when it has taken place at a consistent rate over 10 years. The same applies to losses of £5,000 in a 3–6-month period when there are no other reasons for concern; yet examples such as these are being raised as concerns by the Commission. These customers are not spending "above the national average", whatever average to which the Commission means to refer in the Enforcement Report 2020, and therefore it is at least reasonable for licensees, to decide at their discretion that there is no need to require evidence of affordability in these cases.

Licensees' use of open-source data is also criticised for being inadequate, even in cases where this data more than adequately mitigates risk by demonstrating income at or above the national average, despite reference in the Enforcement Report 2020 to the same being "an important element of an affordability framework".

The result of this ambiguity is that in our experience Commission activity demonstrates a much lower tolerated threshold than the CI Guidance and enforcement reports suggest; a threshold more aligned with the Consultation. In the current climate, this not only exposes licensees to unreasonable criticism from the Commission, but also places those licensees who are unlucky enough to undergo a compliance assessment at a time of such uncertainty, at a commercial disadvantage; a diligent response to criticism being to reduce thresholds and require evidence of affordability sooner, even if this is neither deemed necessary nor yet a formal requirement. One may question whether the Commission has overlooked its statutory obligation to "permit gambling, in so far as [it] thinks it reasonably consistent with the pursuit of the licensing objectives".

The impact

It is no secret that licensees are frustrated and confused, and understandably so. Discretion has given way to prudence; licensees are in the unenviable position of having to second guess what the Commission really expects and compliance assessments are becoming one-sided affairs where, in the main, Commission employees attend with an almost preconceived view as to what is and is not acceptable application of discretion. Nobody is perfect and, due to ambiguity, it is easy enough to call into question individual cases. This is not to say, however, that the vulnerable are not being protected. A very large proportion of the customers whose accounts are reviewed by the Commission never have and never will identify as problem gamblers; they are simply spending their money as they wish, even if at a level that Commission considers inappropriate.

Of course, the regulatory framework permits licensees to challenge the Commission's findings. The reality, however, is that few choose to do so. Commercial realities, protracted Commission investigations, publicity considerations, cost and perhaps shareholder influence, result in most licensees entering into regulatory settlements with the Commission or accepting its findings. This is often their decision whatever the merits of their case. It would not be unreasonable to suggest that a general consensus amongst licensees is that the ultimate sanction will likely be the same anyway, particularly given the ambiguous guidance, so why incur further costs and prolong the inevitable?

Rather than regulate an industry that operates in fear: not the fear of deserved punishment, but fear of a being chosen and inevitably sanctioned for failing to do something it did not fully understand, the Commission would be better placed regulating an industry that is clear on what is expected of it. The present regulatory expectations in relation to affordability are grey and unclear. The Commission has acknowledged as much by consulting on prescriptive requirements. That Consultation now appears stymied, and it is incumbent upon the Commission to back up Tim Miller's positive acknowledgement that "clarifying existing rules will be [the Commission's] immediate priority" and act with urgency to clarify the existing requirements against which it is enforcing. The Commission had no reservation in moving quickly to issue additional formal guidance for remote operators during the Covid-19 outbreak last year, albeit without consultation, so it is capable of acting in haste.

Better understanding will raise standards and could easily be achieved through clarity in guidance. Informal engagement and discussion with the industry, and even possibly training (both internally and externally) controlled, prepared or delivered by the Commission would also be of benefit. How better to put effectively to use some of the £30 million paid in financial penalties and regulatory settlements in the past 12 months? In the meantime, what is absolutely not acceptable is for the Commission to wield its powers through compliance assessments to impose affordability requirements upon licensees which it has so far failed to implement through statutory consultation.

Originally Published 22 April 2021

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