Investing in the UK Gambling Industry
By Julian Harris and Bahar Alaeddini – Harris and Hagan
The gambling industry offers of a wealth of different opportunities for investors to choose from in Great Britain. In this article we explore the headline risks and issues that need to be managed when investing and how to address the risks.
1. “The unknown unknowns”
There are no sure bets. An investor will never know everything about the company, but the investor needs to know enough to make an informed decision regarding an investment, including whether the company has the right licence or if there any reason why they would not be granted the right licence. The Gambling Commission (the “Commission”) does its due diligence on a company applying for a licence to ensure it is suitable by applying five key factors when assessing suitability: identity and ownership, finances, integrity, competence and criminality. We recommend that investors apply these factors in doing their own due diligence.
It is worth noting that the Commission will investigate investors, personally, if they reach certain thresholds. If an individual holds 3% equity or voting power or more he will need to be named and his DOB provided. If an individual holds at least 10% equity or voting power he will need to provide a detailed personal declaration, known as an Annex A application. If the investor is backed by other investors, he will need to consider with his lawyers the extent to which they are investigated; this will be assessed on a case by case basis.
2. Bad reputation
If the company is already licensed by the Commission, it could have a bad reputation with the regulator. The reputation with the Commission is very important because without a licence one cannot trade. This risk can be minimised by finding out as much as possible from asking around in the industry, reviewing the Commission’s sanctions register and reviewing correspondence with the Commission to assess the tone. It is therefore important to have a feel for the company’s relationship with the Commission and dealing with a company that considers regulatory compliance as important.
Quite simply, the company needs robust processes to comply with legal/regulatory requirements in all jurisdictions in which it operates. Failures have consequences in the home jurisdiction as well as the target jurisdiction as regulatory or enforcement action are both reportable elsewhere. Technical systems can and do fail; for example, they could fail to block play from the US, or fail to detect money laundering or problem gambling signs. Regulation in itself is not a risk, but continually changing regulation, particularly in relation to online gambling, could result in regulatory breach, sanction and damage to the company’s reputation, if it does not foster the right attitude or approach to regulation. The only ways to address these risks entail engaging with the Commission, knowing when to seek advice and engaging the services of reputable service providers.
4. Social responsibility
This is a key area for Commission. Around 73% of adults in Great Britain gamble at least once a year, and the vast majority to do responsibly. All operators have a shared responsibility to help players gamble responsibly by not spending more money or time than they can reasonably afford. The Commission does not want to stop operators from being successful. However, recent public scrutiny has meant that the industry must step up its efforts in social responsibility to prove it can be “trusted”. There is no substitute to complying and offering socially responsible products.
The gambling industry in Great Britain is a highly competitive, rapidly advancing and open market. The market develops rapidly as a reaction to technological advances and customer demand to keep them loyal. Now more than ever, customers expect exciting and engaging experiences at the click of a button. The open legal landscape in Great Britain means that licences are available for almost everything so competition will follow swiftly in the wake of any innovative new product or clever initiative. The openness of the market may mean that it is difficult competing in a fiercely competitive industry.
With all that said, investing in this space undeniably offers a wealth of opportunities, which come with great rewards. Risk is a natural part of business and gambling more than anything else involves risk at its very core; the key to success is how the risk is managed.