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UK’s new e-gaming and betting regulations could create a new black market

The unregulated e-gaming and betting market will likely balloon under the UK’s proposed “point of consumption” regime, says Peter Howitt of the Gibraltar Betting & Gaming Association

Recently Gibraltar welcomed the 4th KPMG e-gaming Summit. The summit has grown in size each year and this year’s was attended by an audience of over 200 delegates that included regulators, remote gambling operators and a range of suppliers (lawyers, accountants, software providers, payments providers, telecoms and data specialists).

The growing popularity of this relatively young summit highlighted just how successful Gibraltar has been at attracting and retaining the most reputable large e-gaming and e-betting operators in the world, reinforcing Gibraltar’s reputation as the EU e-gaming hub and reminding us how much more Gibraltar can still do to communicate its industry success stories and its regulatory reputation in Europe. 

High on the summit agenda were the proposed changes to the draft UK Gambling Bill and Finance Bill, now in advanced stages as part of the UK government’s next step in plans to introduce a “point of consumption (POC)” regime to licence, regulate and tax all remote gambling firms supplying the UK market.

The POC proposals suggest UK licensing and regulations will apply to all overseas companies wishing to advertise or offer their gambling services in the UK, and will mean that Gibraltar operators supplying UK customers under their Gibraltar licences must also hold a licence issued by the UK Gambling Commission.

In addition, a gambling revenue tax will now be levied against operators based outside the UK when transacting with UK customers.

Without some significant modification, the current POC proposals will create confused regulatory supervision and market disruption on a worldwide basis. Our concern is that, ultimately, this will benefit unlicensed operators based outside of the European Union, to the detriment of consumers.

In my role as Chief Executive of the Gibraltar Betting & Gaming Association, I have been tasked with representing the Gibraltar industry in discussions with the UK Government and civil servants over the last 18 months. The GBGA has tried to engage in a constructive dialogue with the UK government to ensure that any new legislation actually helps the regulated gambling industry, the government and, most importantly, the consumer. To date we have not met with success in our efforts with the UK and this may leave the industry with little choice but to accept the proposed changes or challenge their lawfulness under EU law.

Given the expertise that exists here, we are well placed and willing to help the UK make the move to a world-leading regulatory environment for online gambling, one which builds on the successes of the EU financial services “passporting model” - which allows licensed operators from suitable jurisdiction to supply the UK based on reliance on their home state regulator and licence - and avoids the UK simply going it alone in a sector that it does not sufficiently understand.

In our view, the POC proposals - which the UK government says are intended to protect consumers and provide a fairer basis for competition - are poorly considered, since they undermine the competitiveness of responsible regulated operators and will be damaging for consumers by fostering a dysfunctional market. From a consumer protection perspective, we believe the UK has failed to establish genuine legal grounds for such a change, and has failed to consider the greater risks to consumers and how best they could mitigate those risks.

To begin with, the POC regime abandons the recognition of licences and local supervision by European jurisdictions, including Gibraltar, and in doing so sets up the UK for both practical regulatory failure and a potential challenge under EU law. For example, under the POC regime operators may be based anywhere in the world, including places with no legal and cultural fit with the UK and Europe, and where UK consumers will have no rights of redress and the UK Gambling Commission will have no effective rights of supervision and enforcement. This will result in an increase in remote tick-box regulatory supervision, with foreign operators obtaining a UK licence to transact with UK consumers but without the UK having any real ability or capacity to properly supervise those operators.

The GBGA also believes the proposals will also result in a large number of UK licensed but entirely unregulated and untaxed foreign operators buying a British licence merely as a “flag of convenience”. Such operators will promote their UK brand in order to supply consumers outside of the UK with gambling services without any UK supervision or taxation.

There is also good evidence of the real danger that consumers will now be captured by black market affiliates and operators, who are able to offer better value as they will not comply with the UK’s POC licensing and taxation regimes. The UK does not currently have a significant unlicensed market for online gambling, largely thanks to the pre-eminence of regulated Gibraltar operators, and the UK appears to have ignored the risks of creating such a market by the introduction of the POC regime.

The situation in other countries mirrors our prediction. In Italy, for example, there is point of consumption licensing and tax regime and the Italian regulator estimates that up to 50 per cent of the market is unregulated. In France, it has been estimated that 70 per cent of sports betting takes place with unlicensed regulators and in Spain, recent figures suggest that unlicensed operators supply 30 per cent or more of the Spanish market.

The UK government’s aims and objectives could be met with a more carefully constructed regime that took better account of the existing regulated online gambling industry that work very well. In this respect, Gibraltar has developed a world-leading, internationally recognised centre of excellence in online gambling, where operators provide customers with a safe and secure environment in which to bet.

The UK consumer has considerable trust in Gibraltar licensed operators.  Only a small number of gambling firms have been allowed to obtain a licence here in Gibraltar, and yet we have an estimated 60-80 per cent of all online play or bets of UK consumers.

It is worth highlighting that the UK is currently embarking on a wide range of regulatory reviews in the gambling space, including relating to advertising standards and enforcement, problem gambling and responsible gambling.  Whatever the outcome of those reviews, it is clear that the regulated sector will continue to input and comply with any changes to advertising, gambling limits and support for customers with gambling problems. The unregulated sector will ignore such restrictions and protections. Now is, therefore, precisely the wrong time for the UK to introduce a range of measures that may create space for an unregulated online gambling market that could be as high as 30 per cent (if experience on the continent is anything to go by).

As with the globalisation of financial services, effective supervision of e-gaming requires greater cross-border cooperation and recognition. Whilst the EU is taking steps to encourage a more co-ordinated approach to the regulation of online gambling within Europe, unfortunately the UK has decided to implement a model that ignores its own past mistakes and those of other European jurisdictions that have previously introduced impractical regimes that have, as their effect, an increase in unregulated online gambling.

If the UK POC regime is introduced there is no doubt that it will impact us here in Gibraltar. However, we remain positive about the jurisdiction’s continued success. Reputable jurisdictions must ensure that its key stakeholders work hard to understand the realities of those specialist sectors that they regulate, focusing on better effective regulation and on quality above quantity. In my view, Gibraltar continues to get the balance right and remains the best home in Europe for this sensitive area of electronic commerce.

Peter Howitt is chief executive of the Gibraltar Betting & Gaming Association




Photo: Getty
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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'