The Gambling Commission has published guidance in the form of frequently asked questions (FAQs) on reverse auctions setting out how it will determine whether a reverse auction is lawful under the Gambling Act 2005. In other words, whether it qualifies under Section 14 of the Act as a prize competition or is, in fact a lottery that, unless licensed, is unlawful.
Reverse auctions are schemes in which a participant must make the lowest unique bid (generally in pennies) in order to win a prize. Depending on the format (online, TV, radio, SMS or print) the prize is shown or described (including the retail value) and participants are asked to submit a bid. This is usually via a premium rate text message, or through registering with the website and paying by debit/credit card, or through pre-purchased credits. As well as the cost of making each bid, the winning participant is usually required to pay the amount of their winning bid to receive the prize. Reverse auction schemes are usually operated as prize competitions, which are not regulated by the Commission.
Depending on how a reverse auction is operated, however, it could be considered to be a lottery. To qualify as a prize competition, a reverse auction must satisfy requirements set out in Section 14(5).
THE SECTION 14(5) TEST
Section 14(5) says that a genuine prize competition is one that does not, as in a lottery, rely wholly on chance, but instead contains a requirement to exercise skill or judgement or to display knowledge. It can also reasonably be expected that that requirement will either
- Prevent a significant proportion of people who wish to participate from doing so (Section 14(5)(b)) or
- Prevent a significant proportion of people who participate from receiving a prize (Section 14(5)(a)).
The Commission sets out a number of factors that it says may enable operators of reverse auctions to ensure they satisfy the test. These include time limits for the submission of bids, the provision of information to participants about previous winning bids (for similar items) and updates on the status of their current bid(s). The Commission accepts that operating reverse auctions of this type may make it possible for participants to apply a strategy to their bidding (demonstrating a requirement for a level of skill or application of knowledge).
If a reverse auction does not meet the test for prize competitions and all the elements of a lottery are present—i.e., payment, chance and allocation of prizes—then it may be an unlicensed and therefore unlawful lottery. Operators of reverse auctions that do not meet the test in the Act must therefore either cease to operate, adapt their schemes to satisfy Section 14, or apply to the Commission for a Lottery Operating Licence and be subject to the regulations and Licence Conditions and Codes of Practice associated with this type of licence.
The Commission reminds operators of reverse auctions that the onus is on them to satisfy themselves that their schemes are compliant. In other words, just because you’re not aware that your reverse auction is a lottery and no one has told you that is what it is, it doesn’t mean that it isn’t. In that sense the “guidance” is as much a warning to operators that the Commission will take action where schemes are organised and promoted such that, in its view, they amount to unlicensed and therefore illegal public lotteries. The message, however, is that schemes will not pass the Section 14 test where operators only provide participants with information on whether they were successful or not as opposed to providing, from the submission of the first bid, additional information of the kind provided on standard auction sites like e-Bay.