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Online gambling regulation: tax will be taxing in the long-run
As a motivator or mission statement for gambling regulation, tax is not often given much prominence in regulators’ annual reports – the usual ones are ensuring propriety of ownership, fairness of games and protection of the weak and vulnerable. These are the purist regulator’s raison d’etre: tax is typically kept in the background, or (as in the case of the UK), entirely separate. However, an increasing number of global regulatory decisions seem to be fiscally motivated. This will have a significant impact on the size, shape and competitiveness of the industry.

Pennsylvania is by no means the first down fiscally-motivated regulatory road and is coming to the end of this process:  the remote gambling bill that has been approved in that state’s lower chamber is now out of time for final approval and governor’s signature in the current session but may be tagged on to the 2016/17 budget bill (which is also out of time but clearly critical enough to get senators back from their July 4th celebrations). The draft budget seems to be very dependent on the legalisation and regulation of gambling taxes: yield estimates vary between $250m and $400m of the $1.25bn overall needed to balance the budget.

Pennsylvania has an established and well-respected casino regulator, which has had plenty of time to consider how to regulate this new sector effectively, using their normal mission criteria (which are roughly as above).

The problem in starting at the “wrong end” – seeing the fiscal gain rather than the social requirement – lies in the state’s adequate resourcing of the regulator, which is unlikely to be factored into the plan (it may be, in the Pennsylvania case; but it would be unusual in this respect). The goose that lays the $250m egg (in Pennsylvania) each year is fragile. It’s susceptible to bad press, particularly, on two fronts – criminality and problem gambling. These risks are both largely manageable for a properly resourced regulator, but not otherwise.

In fact, they are only controllable at all in a regulated environment, so perhaps the legalise and regulate initiative should be welcomed in all its forms – even if motivated by the prospect of fiscal gain – or not. It is undoubtedly much better than nothing, but only time will tell if the sector – operators and regulators – can build sustainably on a tax-driven model. This truism applies across the world, even in the UK – which certainly started from the “right” end in 2005, but is now more acutely politically sensitive (than any US state) to adverse developments in the sphere of problem gambling and social responsibility.

Lawful gambling is critically exposed to its ability or lack thereof to control its risks, eg: match-fixing, compulsive behaviour and criminal money. The arguments for prohibition, often coming from vested interests, are given such substance as they may have by highlighting the industry’s failure to control these issues– and that is in some large part dependant on properly resourcing the regulators.

In this light, it is interesting that The United States Conference of Mayors has voted to join the American Gaming Association’s lobbying campaign to legalize and regulate sports betting in the United States. AGA’s spokesperson reported “Momentum continues to build for addressing the nearly $150bn illegal sports-betting market that fails to protect the integrity of sports we all love.”   

“Momentum” is not visibly attaching to the decision on New Jersey’s long-awaited attempt to overthrow the PASPA regime that blocks this development – it is now into its fourth month since the hearing; and although the development is (also) to be warmly welcomed it may be relevant, if a little cynical, to note that $150bn is quite a smelly kipper to drag through that community.
Elsewhere than the US, Holland is the latest State to attempt to strike a balance between good regulation and a fiscal outcome which appears attractive to non-gambling stakeholders. Multiple licences and a broad range of products are to be welcomed as keeping as much of the market as possible locally licenced (Holland has even gone so far as to attempt to level the customer playfield between online entrants and land-based incumbents by disallowing the use of existing databases). However, a GGR tax of 29%, while not directly impacting consumer prices (as a turnover tax would), is likely to be high enough to push the market into a few large (or locally savvy) operators, reducing competitiveness and therefore opening opportunities for .com operators. The Dutch regulator might be initially relieved by the lower workload of a smaller number of licensees, but it is likely that Dutch online customers will find a good deal more more supply than the half-dozen or so operators likely to be profitable in such a high tax environment. This will reduce the real tax yield on Dutch online gambling spend, while also increasing the long-term problems of un(POC)regulated online gambling facing the Dutch government.

UK: In Parliament: Nessum Dorma
This has been another busy – and potentially significant – week in Parliament for the gambling industry. Despite the confusion over Brexit, wrangling over Government and Opposition leadership and the drama of Chilcott, life goes on.

The major set-piece of the week was Ronnie Cowan’s Westminster Hall Debate on dormant betting accounts. The SNP Member for Inverclyde has a bee in his bonnet about adequacy of resources for prevention and treatment of gambling addiction and sees dormant betting accounts as legitimate sources of funding.

The debate marked a return to action for Sports Minister Tracey Crouch after five months on maternity leave. She revealed that the Government’s independent commission on dormant assets was indeed looking at gambling accounts and would report back by the end of the year. Crouch’s reappearance in the gambling debate may also be significant in terms of the Triennial Review, a matter which the Government has ducked repeatedly in her absence.

The debate also gave Kelvin Hopkins a platform to mark his debut on gambling matters as shadow minister. The tenure of Opposition ministers may be uncertain but Hopkins’s claim “I suspect that I would go further than my party might like” on reining in the gambling industry and his hope “to persuade my party to pursue proper action” may be a warning signal.

Whether Cowan’s call for a raid on dormant accounts (which echoes the recommendation made in Lord Foster’s report in 2010), leads anywhere is open to question. Nevertheless, it seems likely that the exercise to cost the RGSB’s strategy will reveal a funding shortfall – and closing the gap will present another interesting challenge to industry. 

Elsewhere, the APPGs have been on good form this week. On Monday, the All Party Parliamentary Betting & Gaming Group held the final seminar in their series on the future of gambling in Great Britain – this time focusing on the area of responsible gambling. The following day’s All Party Parliamentary Party Group on Fixed Odds Betting Terminals was predictably a somewhat feisty affair. Chaired by Carolyn Harris (Lab, Swansea East) and supported by (ITMA) Ronnie Cowan, Margaret Ferrier (SNP, Rutherglen and Hamilton West), Jeff Smith (Lab, Manchester Withington) and Lord Clement-Jones (LibDem), the APPG heard evidence from pressure groups, the Campaign for Fairer Gambling, Rethink Gambling and GRASP.

In addition to the well-rehearsed arguments against FOBTs, the APPG also heard concerns about category B3 and category D machines, remote gambling, the volume of TV advertising for gambling and payment methods.

The APPG is expecting to hear oral evidence from other parties (including the ABB and DCMS) before the end of the year, while the deadline for written submissions is 31st July.

Outside of committee rooms, the steady flow of gambling-related Parliamentary Questions continued:
  • Leader of the Liberal Democrats, Tim Farron (Westmorland and Lonsdale) asked the Government how many people had been treated by the NHS for gambling addictions in the last five years, reprising a favourite theme of Luciana Berger the erstwhile Shadow Minister for Mental Health. As in the past, the Department of Health was unable to provide information.
  • Ronnie Cowan asked whether levels of operator funding for the RGT (and others) ought to be linked to their profit margins (presumably as distinct from their revenue levels). Tracey Crouch’s response indicated that the existing mechanism (based on GGR) was deemed appropriate – even if the actual funding levels might not be.  
  • In the Lords, Viscount Astor made enquiries concerning the fate of the impact report on the horse-racing Levy replacement that the Government had commissioned from Frontier Economics. Responding for the Government, Baroness Neville-Rolfe announced that the report would be published “in due course”.
Early Days for FOBT opponents
Carolyn Harris’s Early Day Motion 61 – calling on Government to grant greater powers to local authorities to control machine gambling in betting shops – has continued to gain support. It has now been signed by 63 MPs, making it the fifth best supported  EDM (out of 304) in this Parliament.

One-third of MPs in Scotland have Scotland have signed the EDM, along with 28% of MPs in Northern Ireland and 20% of MPS in Wales, but just 6% in England. The lion’s share of support has come from the SNP (31% of the party’s MPs) and Labour (14%).

European Football: match-fixing
Away from the glitz and glamour of the European Championships, UEFA secured a significant victory this week in the Albanian football league match-fixing story.

Six-time and reigning champions Sportiv Skenderbeu, announced in May this year that it was being investigated by UEFA for match-fixing, concerning multiple domestic and European competition matches. In June, UEFA handed Skenderbeu a 12-month ban from UEFA competitions (specifically, Champions League qualification). The club appealed the case to the Court of Arbitration for Sport (CAS), who have this week upheld the decision, meaning the ban stays in place.

The significance of the decision is in the endorsement that CAS gave UEFA’s ‘Fraud Detection System’ (ran by Sportradar). The system monitors price movements from global betting operators to help to identify potentially fixed matches. Both irregular moves in market prices, and mathematically inconsistent prices between markets are potential triggers for such an event. 
It is of course worth remembering that the use of algorithmic data solutions isn't the complete solution to match-fixing identification, with intelligence sharing and strong communication between betting operators and sports associations also crucial. However, now that this system has been tested in court, we can assume that more and more cases will be identified, and UEFA will use similar strong punishments in all cases going forward.

UK: Horse Racing: "Leakage" - Next Chapter
Last week, Arena Racing Company announced a joint venture to launch a TV channel for LBOs, available from 1st September 2016.  ARC had already clearly signalled its intentions to go to the market independently, most notably with the acquisition of the South African rights.  The reported driver behind the new channel for independent LBOs "to purchase racing content in the most efficient manner possible".    

Horseracing economics was also raised in Parliament this week when it was confirmed the Government intends to publish the findings of the Frontier Report in "due course".  The Frontier Economics report is an independent economic analysis of the costs and revenues of the horse racing sector in Great Britain. This report forms one element of Government’s work on determining the rate which will be payable by gambling operators under the new funding system which is due to be in place by April 2017.  

UK: Horseracing: Best is the enemy of good?
The BHA had been enjoying a lack of negative press coverage recently, particularly in the case of the perennial press favourite – the rehearing of the trial of trainer Jim Best, who had his four year ban from training quashed due to a potential perception of bias within the BHA’s disciplinary committee.

Following this result, the BHA commenced a review of its disciplinary procedures by two experienced QC’s, and provided the assurance that all members of their disciplinary committee from now on, would be independent. This included the hiring of sport arbitrators, Sport Resolutions, to provide a pool of completely independent members.

However, representatives of Best have since announced the discovery of ‘the sharing of confidential information’ between Sport Resolutions and the BHA, with regard to who would be selected to chair the disciplinary panel in the case of Jim Best without disclosure to them. The Chair was named as William Norris QC, arguably not fully independent due to his working relationship as UK Doping Committee Panel member with former conflicted chair, Matthew Lohn.

Best’s legal team have communicated their misgivings with these discoveries, and the BHA has responded with another assurance that they will provide ‘a person of unquestionable independence’ to chair the rehearing. However, a fair trial will be challenging due to the press coverage of the former trial, appeal and the retrial.

More broadly, the issue begs the question of whether the BHA’s requirement for disciplinary panel members to have horseracing knowledge (obviously a ‘best’ alternative) is a necessity and whether it is limiting the pool too far. The UK Judicial system does not require a specialist in finance to hear a fraud trial to get a fair and successful result, so a broader body of competent professionals relying on expert witnesses may be a start in helping to strengthen the independence and widen the ‘club’ of horseracing’s quasi-judicial function, to all stakeholders’ benefit.

UK: Horseracing: luck of the draw
The Horserace Bettors Forum, set up last year in an attempt to bring horserace betting customers closer to the organisation and governance of horseracing by giving them a public voice, has aired its concerns of the increase in non-runners.

The increase of 12% in non-runners over the last year has been blamed on a relaxed attitude to trainers being allowed to self-certify a horse’s inability to run, and the potential for abuse when there are unfavourable conditions to run such as a poor draw, allowing trainers to withdraw horses late on in order to run in more opportune races soon (sometimes very soon) after.

Horse welfare should of course, be the priority, and all involved with the training and riding of horses should be given the opportunity of withdrawing a horse from a race if they feel the horse is not fit to run for whatever reason.

However, this system currently relies on trust and could be disadvantaging both serious horserace betting customers and bookmakers. Moreover, trust in processes generating fair and productive results is in increasingly short supply across nearly every issue involving racing and betting. More process and transparency in this area could benefit (nearly) all parties.
Australia: Greyhounds: NSW ban
Despite Greyhound Racing NSW (GRNSW) looking to overhaul integrity protocols and a deliver a sustainable animal welfare strategy, the State Government of New South Wales, Australia announced this week that greyhound racing will be banned from 1st July 2017.  The Government announced an ‘orderly shutdown’ of the industry over the coming months following a special commission detailing "widespread and systematic mistreatment of animals".  

The ban comes after ABC's Four Corners program exposed widespread animal cruelty and cheating (live baiting) which then led to a special commission which was supported by continued lobbying from RSPCA Australia.  Within the UK, we have already had an expose "warning shot" when the BBC Panorama programme "Drugs and Money : Dog Racing Under Cover" (November 2014) called the integrity of greyhound racing into question, albeit the public concern / coordinated action has not reached Australian standards.

It is surprising that an outright ban was chosen ahead of increased regulation and the learnings for live sports should include transparency (the need to published data), accountability (tracking of animal welfare) and regulation (enforceable standards). In NSW the Greyhound Racing Authority was responsible for both the regulation of the industry and its commercial development, promotion and marketing: here the self-regulatory model clear failed.

Tabcorp announced that NSW greyhound racing represented around 5% of the company's total annualised wagering turnover and "expects a significant level of substitution will occur to other wagering products such as thoroughbred racing, harness racing, other sports and animated racing."

However, while the economic impact for betting can be played down, the case provides an object lesson on how knee-jerk political concern can push a ‘nuclear’ button when politicians do not believe they have a credible ‘measured’ alternative option available in attractive timeframes. This lesson applies to many sectors in many markets across the world.
eSports: Integrity back on the Radar
This week saw the creation of the eSports Integrity Coalition (ESIC); an initiative set up by social and betting site, Unikrn, tournament organiser, ESL, platform and integrity software provider, Sportradar and bookmaker Betway.

The group of businesses announced the appointment of former ICC and UK Anti-Doping Committee member, Ian Smith as chair. The intention is to tackle all forms of cheating within eSports, including prevention, investigation and prosecution of doping and match fixing.

While this is clearly a step in the right direction for eSports integrity, the absence of a sport governing body means this remains an incomplete solution, with reliance upon tournament organisers to provide information of all players and their conduct. It also fails to address the issue of illegal gambling, which is arguably where many of the problems begin in the first place.

eSports: Kieran Brown,  FIFA Man Sitty for Man City
Premiership Football clubs are no newcomers to the eSports scene, with many clubs recruiting eSports players or teams of players to represent their clubs at tournaments and events; the latest signing being 18 year old Kieran Brown, a FIFA6 pro player, to Manchester City.

It is a clear sign of rapidly changing times, that premiership football clubs are recruiting stars from the eSports scene to promote their product rather than the other way round (for those of us born before 1992!). Bookmakers may be a beneficiary of this cross selling and should bear this in mind when attempting to recruit those ‘Millennials’ which are over 18, while safeguarding those under.
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Disclaimer; The analysis provided in this report represents the opinions of the authors. Any assessment of trends and change is necessarily subjective. The information and opinions provided herein are not intended to provide legal, accounting, investment or policy advice, nor should they be used as a forecast. 
Regulus Partners may act, or have acted, for any of the companies and other stakeholders mentioned in this report.
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