One of the areas of gambling that has bucked the economic trend in the last 12 months is sales of tickets in the National Lottery and Euromillions lottery. This is perhaps because lotteries, more than any other form of gambling, appeal to the emotions. Buying a lottery ticket in a National draw is little more than purchasing the right to daydream for a few days about what life changing wealth would represent.
Indeed, the prizes offered in some European lotteries are so large that even if divided among a large number of winners, they would still represent a formidable challenge to the most professional spendthrift. It is perhaps this fact that has led to a recent growth in commercial lottery syndicates, mostly operated online. Are such syndicates legal and how should they be treated? The purpose of this article is to get back to basics in a field that practitioners and regulators seem to find difficult to navigate.
What is a lottery syndicate?
In a lottery syndicate, a group of individuals agree to appoint someone to purchase lottery tickets on their behalf and to share out any winnings amongst members of the syndicate on a regular basis. The essence of a syndicate is that people prefer to have a large number of pleasurable "winning sensations" rather than the faint hope of a big jackpot, which may never come in their lifetime. The organiser will retain the tickets and collect any winnings (otherwise the arrangement is little more than buying as agent for each of the participants).
There are a number of different forms of lottery syndicate. At the lowest level, it may simply be an informal arrangement between a few individuals to purchase lottery tickets and to share any winnings equally between the members. Such arrangements are simple contracts (or perhaps it might be said trusts). Other syndicates are organised on a much more commercial basis. Most of them promise some form of "system" by which they increase the chances of a win substantially, and offer a number of "benefits" to their members such as a system for selecting numbers together with information (albeit of little substantial value) about winning numbers from the past and so on. Some also engage in a form of multilevel marketing to encourage members to recruit new players. The status of multilevel marketing schemes (and particularly the potential characterisation of certain schemes as so-called "snowball" or "pyramid" schemes) is outside the scope of this article but is itself a difficult area.
Are lottery syndicates legal?
All lottery syndicates must, to some extent, promote lotteries since they encourage the sale of tickets in them. In the UK, the Gambling Act 2005 provides that it is generally an offence to “promote a lottery” (s.258), a term which has a wide meaning (defined in s.252) to include, not only (i) the printing, distribution or publication of promotional material, (ii) inviting someone to participate in a lottery and (iii) selling or supplying a lottery ticket. Most apposite of all, s.252(2)(j) provides that someone will promote a lottery if he:
“does or offers to do anything by virtue of which a person becomes a member of a class among whom prizes in a lottery are to be allocated”
This wording appears to be expressly designed for lottery syndicates. Fortunately, even if operating a syndicate is “promoting” a lottery, the offence in s.258 is subject to a number of exemptions. These mean that it will not be an offence to promote a lottery which is (i) exempt under the Act or (ii) licensed under the Act or (iii) which forms part of the National Lottery. However, since it would be an offence, for example, to promote the Irish National Lottery in the UK, syndicates still need to take care about the promoting offence.
Do lottery syndicates need to be licensed?
This is a complex question, which the Commission has sought to short-cut as described below. The test for whether an activity requires a lottery operating licence is set out in s.65, and requires anyone who “promotes” a lottery to have a licence. This forces us to return to the definitions in s.252. The Gambling Commission has published guidance2,, which states:
“You don’t need an operating licence if:…You are running a lottery syndicate provided that you do not offer to do anything by virtue of which a person becomes a member of a class among whom prizes in a lottery are to be allocated. In the Commission’s view where the syndicate organiser alone is the ticket holder in a lottery (not the syndicate members) and all that the organiser does is to administer some arrangement with the participants in the syndicate as to how he is to distribute any prize that is won in the lottery no licence is required. Part 10 Section 252(2)(j)”.
This seeks to draw a distinction between a syndicate where participants become part of the class of winners (licence required) and where they simply have some kind of contractual or other legal right as against the organiser, but not a right to winnings per se (no licence required). It is not easy to justify such a distinction based upon the words of s.252. The natural meaning of: “by virtue of which a person becomes a member of a class among whom prizes… are to be allocated” seems to cover both situations. It may be that the draftsman of s.252 was focused on the offence in s.258 rather than the use of “promoting” in s.65, a fact which forces the Commission into its linguistic gymnastics. One must be sympathetic with the position they have adopted because carrying through the logic that a syndicate needs to have a licence arrives at a rather fruitless end point. We have already looked at the limitations on the offence in s.258, and the result appears to be that, whether or not a licence is technically needed, no offence would be committed by failing to have one. Perhaps, on balance, it is best to leave the point as the Commission does, and save any further blushes – though we have not even touched on the tax implications of the distinction that they draw.
What about financial regulatory law?
Does the operation of a syndicate carry with it financial regulatory requirements? The surprising answer is that it may. Under the Financial Services and Markets Act (2000) (“FSMA”) certain forms of investment business are regulated. In very simple terms, this means that they can only be undertaken by regulated persons and their advertising is strictly controlled. The category of restricted investments includes “collective investment schemes” (“CISs”) as defined in s.235 of FSMA. Although it might be thought that a lottery syndicate is better defined as a “collective loss scheme” rather than an investment, the terms of the definition are very broad and include any activity where participants take part in an arrangement to participate in or receive profits or income arising from the acquisition, holding, management or disposal of property and where:
- the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
- the property is managed as a whole by or on behalf of the operator of the scheme.
The scope of s.235 has been considered by the Court of Appeal in FSA v Fradley & Woodward. The case involved the operation of a betting tipping service and the Court decided that, during some periods of its operation, a CIS did exist. There are a number of arguments as to why a betting tipping service (which presumably allows the organiser to exercise some kind of "investment skill") should be distinguished from a lottery syndicate. Nevertheless, the author is aware that the FSA has, from time to time, attacked lottery syndicates on the basis that they are CISs and so care needs to be taken.
It is fairly clear that some commercial lottery syndicates currently operate in a way that might give cause for concern in relation to consumer protection or advertising. However, the same may be said of some book clubs or hire purchase schemes. It is clear that there is a need for regulation to ensure that punters understand the nature of what they are doing. However, it seems preferable that this role is undertaken by the OFT or local trading standards. Lottery syndicates are not lotteries; nor are they financial services in any real sense but, until we have some further clarification of the law, their operation will require careful thought.
This article first appeared in World Online Gambling Law Report.