IOL Journal Article January 2017

Changes to Operating Licence fees and gaming machine call for evidence.

The Department for Culture, Media and Sport (DCMS) and the Gambling Commission (the Commission) held a joint consultation between July and September 2016 on potential changes to Commission fees to take effect from April 2017.

There were three main options considered and the key features of the option preferred by the DCMS and the Commission were:

• An average reduction of fees by 10% to reflect efficiencies achieved in the Commission’s operating costs;
• The retention of a fee band structure, but with the introduction of bands based on gross gambling yield (GGY) instead of number of premises for non-remote betting, bingo and arcade operators, and in the case of non-remote 2005 Act casinos, instead of the size of premises;
• The introduction of additional fee bands to allow for more gradual fee increases and encourage the growth of small businesses.

The other main options for consideration were to make no changes to the current fee levels, or to reduce annual fees for each operator by a flat 10%.

In practice, the Commission predicted that the proposed changes would result in approximately 1,900 operators seeing a reduction in their fees, no change in fees for around 1,000 operators and fee increases for fewer than 100 operators.

The Commission published their response to the consultation on 21 December 2016. The paper outlines the changes to take effect from April 2017 and includes some amendments to the initial proposal.

One of the significant changes from the existing fee structure is the shift to GGY-based fee categories for non-remote betting, bingo and arcade operators.

GGY is calculated as A + B + C, where:

A = the total amount paid to the licensee by way of stakes in connection with activities authorised by the licence during the relevant period.
B = the total of any other amounts (exclusive of VAT) that will otherwise accrue to the licensee directly in connection with activities authorised by the licence during the relevant period (e.g. bingo participation fees).
C = the total amount that will be deducted by the licensee for the provision of prizes or winnings in connection with activities authorised by the licence during in the relevant period.

The Commission will be writing to operators prior to the implementation of the fee changes to confirm their GGY, which will be based on an operator’s most recent annual regulatory return or, in the case of operators that submit returns quarterly, the previous four regulatory return submissions.

This aspect of the proposal was met with serious concerns from the non-remote bingo sector, with more than 35 bingo operators expected to receive significant increases in fees under the original proposal. In response, the Commission have amended the proposal to introduce an additional fee band for bingo and AGC operators by separating the originally proposed band for operators with GGY of £750k to £2m into two bands of £750k to £1.25m and £1.25 to £2m. Those in the £750k to £2m band will pay an annual fee of £2,050, instead of the originally proposed £3,055.

In addition, the threshold for the two highest bands in the bingo and AGC sectors have been reduced from the proposed GGY of £300m (band E3) and £500m (band E4) to £225m and £325m respectively. According to the Commission, this is “to ensure that costs are spread more proportionately among the largest operators”.

Within their response, the Commission note that although 35 bingo operators would receive significant fee increases under the original proposal, around 150 bingo operators would receive fee reductions, with the smallest bingo operators at social clubs and holiday parks set to benefit from the GGY-based structure.

Furthermore, the Commission anticipates that for those bingo operators subject to an increase, their new annual fee as a percentage of their GGY will be between 0.08% and 0.13% for regional bingo operators and between 0.09% and 0.27% for those operators currently in fee category A.

The Commission is aiming to realign the proportionality of their cost recovery with these fee changes and are of the view that most of their costs are attributable to thematic work, citing examples such as investigation of new gambling products, advising government on gaming machines and monitoring developments in anti-money laundering. These costs are in contrast to the costs of other work such as direct compliance and enforcement, which the Commission says are relatively fixed.

Justifying the move to GGY for non-remote operators, the Commission claim that the amount of thematic work generated by an operator is more appropriately linked to the volume of gambling an operator generates than it is to the number of licensed premises in an operator’s estate. The Commission is also of the view that the volume of gambling generated by an operator is the “main driver of risk to the licensing objectives, and therefore of the Commission’s regulatory effort”.

The Commission also highlighted the need to realign costs with respect to GGY in the remote betting sector in particular. They consider the current fees to be too low to recover a fair proportion of their costs from large remote betting operators given the amount of thematic work driven by those operators. There will therefore be fee increases for a number of medium or large-sized remote betting operators, but there will be significant fee reductions for a lot of the smaller operators.

The Commission acknowledged the cost benefits inherent in the economies of scale involved in regulating larger operators and intends to reflect this by reducing the fee as a percentage of an operator’s GGY as they move up the fee bands.

Another significant change to be brought in from the proposals is the introduction of new “host” operating licences. These are aimed at gambling software licensees that also provide facilities for gambling by making their games available directly to customers of remote casino, bingo and betting operators, but do not contract with those customers. From April 2017 these operators will no longer be required to hold a full operator’s licence as well as the software licence, instead they will need a host licence.

The host licences will be subject to fees based on GGY, however the fees will be lower than those for the corresponding full licences. This reflects the Commission’s view that hosts require less regulatory effort as they are not contracting directly with, or managing the accounts of players, but still play a role in supporting the licensing objectives by providing facilities for gambling.

For the purposes of calculating GGY, hosts should take account of any payments they receive from the B2C operators they contract with, and the B2C operators will take account of the amount they receive after making any agreed payments to the host.

Review of Gaming Machines and Social Responsibility Measures

Since the last Journal the DCMS issued a Call for Evidence on the review of gaming machines and social responsibility requirements across the gambling industry. The review was launched on 24th October 2016 and ended on 4th December 2016.

The wide ranging review asked for comments on:-

• The maximum stake and prize limits for gaming machines across all premises licensed under the Gambling Act 2005;
• The number and location of permitted gaming machines across all licensed premises; and
• Social Responsibility measures implemented to protect players from gambling-related harm, which included whether there is evidence on the impact of gambling advertising and whether the right rules are in place to protect children and vulnerable people.

The Government stated that the review will include a closer look at the issue of category B2 gaming machines (more frequently known as Fixed Odds Betting Terminals (FOBTs)) and specific concerns about the harm they cause, to players and to communities.

The Government’s published objective is to understand whether current allocations of gaming machines strike the right balance between socially responsible growth and the protection of consumers and the communities in which the machines are allocated.

Following this the Government will consider the proposals, which are then likely to be the subject of a consultation process with stakeholders, to begin in the spring of 2017. Many in the sector believe the current £100 stake permitted on B2 gaming machines will be reduced at the conclusion of the consultation.

New Chairman of the Gambling Commission

Last, but most certainly not least, the Gambling Commission has a new Chairman, Bill Moyes, who took over from Philip Graf in September 2016, just prior to the publication of the last Journal. The appointment, by the Culture Secretary Karen Bradley MP, is for a term of five years.

Bill Moyes also serves as Chair of the General Dental Council, which regulates dental professionals in the UK and he has previously held positions as Director General and Executive Director of British Retail Consortium, and held non-executive directorships with the Legal Services Board, the Priory Hospital Group and the Office of Fair Trading.

For further information on this issue contact Partner and Head of Betting & Gaming, Nick Arron, 0115 953 8500.