A previous post in this blog celebrated the regulation of internet gaming and the opportunities it presents for the gaming industry. It did, however, also highlight the challenges that regulation presents, particularly in terms of the need for operators to constantly adapt in order to comply with divergent regulatory regimes as they develop in individual jurisdictions.
The current scramble for licensing in the United Kingdom, resulting from the 2014 amendment to the UK Gambling Act, is a case in point. It demonstrates how the emergence of a new regulatory regime (or, more accurately, the replacement of one regime with another) can be particularly challenging to the established and compliant gaming industry.
The UK’s 2005 Gambling Act pioneered what many hoped would be the EU-wide approach to the regulation of internet gaming. The UK recognised gaming licenses issued by other EU jurisdictions (and a carefully selected handful of “white-listed” non-EU jurisdictions), and allowed operators in possession of such a license to market their services to UK consumers without requiring them to hold a UK license. The 2005 regime was, in that respect, the poster child for EU-law compliance in the world of online gaming regulation.
All that joy came to a screeching halt when the UK Government announced that, from late 2014, it would begin taxing gaming revenue generated by UK players on a “place-of-consumption” basis. To facilitate the collection of such tax, the UK would require operators targeting the UK market to become licensed in the UK. No longer would EU-licensed operators be able to access the market on the merit of their existing UK license.
Faced with criticism that this was essentially a “tax grab”, and therefore inconsistent with the principles of the EU’s internal market, the Department for Culture, Media and Sports (DCMS) “upgraded” the place-of-consumption reform into an overhaul of the UK’s regulatory landscape, quoting consumer protection and fairness as the prime motivators. The jury is still out on whether this (tactically brilliant) move was enough to immunise the reform from legal challenge, but that question is not the focus of this post. Rather, I would like to highlight some of the practical difficulties that arise when a jurisdiction makes such a dramatic about-face in its regulatory approach.
The UK gaming market has always been a golden nugget for online gaming operators. Therefore, operators have, to the most part, structured their business in a manner that would allow them to legally target UK players. Basing their businesses in the EU or in other “whitelisted” jurisdictions, operators secured legal access to the UK market. Naturally, those operators structured their business to comply with the requirements of the particular jurisdiction in which they were licensed. For example, operators licensed in Malta might have obtained a Class 4 license for their gaming platform and a corresponding Class 1-on-4 license for their B2C operations. Those structuring decisions were primarily driven by the compliance requirements of the licensing jurisdiction, but obviously also had significant corporate, tax, technological and other ramifications (some of which are quite substantial, and difficult or costly to change).
Alas, when the UK’s place-of-consumption reform kicked in, these structures (which were obviously never an issue under UK regulations, since they were not subject to UK law), suddenly became burdensome in terms of UK licensing requirements. While the UK Gambling Commission did allow operators to avail themselves of “continuation rights” on the basis of their foreign license, it did not exempt them from specific UK licensing and structuring requirements, which they had never been subjected to in the past. Thus, foreign businesses that had been operating in the UK market lawfully for years on the basis of a well-established structure, were suddenly (or, more accurately, within a few short months) required to restructure their entire operations or face and costly extensive licensing requirements. Needless to say, the ramifications for established businesses, suddenly compelled to reorganise, were far from trivial or cheap and (I daresay) are yet to be fully realised by the industry and its advisors.
Another quirk came in the form of the requirement presented by the UKGC that operators explain the legal foundation for their decision to accept players from any jurisdiction worldwide to which they “actively market” their services or which generates more than 3% of their revenue. The UKGC explained this requirement in the context of its concern over operators’ financial stability and overall suitability for licensing. It is, however, a particularly curious requirement given that it is simply inconsistent with the UKGC’s own regulatory stance.
Since adoption of the 2005 Gambling Act, the UKGC’s position had always been that UK licensed operators were legally allowed to accept players from around the world on the basis of their UK license. Out of the blue, the same UKGC is now requiring foreign operators, operating in accordance with other jurisdictions’ licenses, to explain the legal foundation for their decisions on how they make use of those licenses in dozens and dozens of worldwide jurisdictions. In other words, the UKGC is holding foreign licensed operators seeking a UK license to a standard to which it has never held its own licensees. While it remains to be seen how the UKGC will practically treat applicants’ submissions with regard to their operations in various “grey” markets, the irony and blatant unfairness of this new requirement requires no further explanation.
Interestingly, the reforms genuinely aimed at protecting players, will probably prove the easiest ones for operators to adapt to. This is because those operators are largely already subject to similar or stricter requirements in their “home” jurisdictions (a fact that calls into question the overall justification for the reform… but I already promised that wasn’t the subject of this post).
Bottom line – the UK regulatory authorities are making the classic mistake of fixing the unbroken. It will initially be operators who pay the cost of the changes required to comply with the burdensome demands of the new UK regime. However, basic economics dictate the inevitable – these costs will eventually translate into a less attractive offering to UK consumers, and ultimately – reduced government revenue from taxes. In other words, everyone loses. To slaughter another idiom – the wheel was spinning beautifully; if no one had put a spoke in it, there would be no need to reinvent it.