Following the Government’s publication of its White Paper on 27 April 2023, we shared our initial thoughts and are following up with a series of articles digging into the proposals in more detail.

We have created an implementation tracker to assist us all in keeping on top of developments. Through that, you will also be able to access the Wiggin team’s analysis of the Government’s initiatives, the timings of consultations plus any resulting changes and the potential impact on the sector.

This article will focus on the key proposals around what we all call “affordability”, the area of regulation which has attracted the most intense scrutiny and debate in recent years, and which is central to the Government’s stated policy aims.

We consider the history of this concept in order to properly assess the Government’s proposals and we then provide commentary on the pathway ahead.

We submit that the White Paper will require the Commission to re-think its approach to this tricky area, and also retreat from a position that we have consistently argued, in articles on the Front Runner and in other fora, was never supported by actual regulatory requirements.

Are you clear what the Regulatory Objective actually is?

If you ask anyone “should a gambling company permit a customer to spend money they can’t afford?”, you will get an array of answers, but the majority will say, “of course not”.

This has always been the central challenge around affordability. It has a somewhat noble objective that can, in principle, be hard to object to. However, the practical implications of it begin to make it less appealing.

For, in order to take steps to ensure a customer does not spend “beyond their means”, an operator needs to intrude into a customer’s personal financial circumstances, whilst navigating the moral minefield associated with preventing people from spending their money how they wish. Any assessment of ‘affordability’, and the treatment of customer losses as a proxy for potential harm, need necessarily balance the free agency of adult individuals to choose how they wish to spend their money against the risk that customers suffer harm through gambling. Striking this balance is not straightforward and goes to the heart of the Government’s Review.

Of course, customer spend is just one marker that operators are already required to take account of when designing and implementing measures to address consumer harm, and sits alongside other systems that operators put in place to identify signs that customers may not be in control of the time and money they spend on gambling.

The Commission’s original Customer Interaction Guidance, which entered into force in October 2019, mandated operators to use open-source data to help “assess affordability”, including by establishing loss thresholds which were “realistic, based on average available income for your customers”. They were also required to recognise the Commission’s view that “most people would consider it harmful if they were spending a significant amount of their discretionary income on gambling”.

The Commission is an “outcomes-based” regulator, which enables operators a degree of latitude when designing processes. They need to identify the intended regulatory outcome and build a process to achieve it.

As such, it was something of a surprise when the Commission published an assertion in the 2020 Enforcement Report that “Customers wishing to spend more than the national average should be asked to provide information to support a higher affordability trigger such as three months’ payslips, P60s, tax returns or bank statements which will both inform the affordability level the customer may believe appropriate with objective evidence whilst enabling the licensee to have better insight into the source of those funds and whether they are legitimate or not.”

It’s worth reading that again – it says as soon as someone spends more than the “national average” (undefined in the Enforcement Report) then the operator, in effect, needs to conduct a form of enhanced due diligence to prove they can afford it. This was some leap.

Operators are entitled to consider spend as part of their overall risk-based assessment of whether any particular consumer should receive a customer interaction and/or at what level they should take the step to intervene. The Customer Interaction Guidance acknowledged this when it stated (at paragraph 2.5) that “gambling harms cannot solely be measured in terms of finance and resources”.

The Commission’s approach betrayed the established principle that regulatory compliance should be driven by the outcomes it aims to achieve. Its approach of pressuring operators to install processes that require them to obtain documentary evidence of earnings at far lower levels than might realistically be considered financially unsustainable was, in our view, an unjustified abandonment of that established principle.

What is the current approach taken by the Commission?

In May 2021, the Commission published its response to the 2020 “affordability consultation”. At the time, we commented on that response as we felt it marked a change of tack. It is fair to say, the Commission’s public lexicon had notably shifted and we saw the emergence of themes that the reader will recognise in the White Paper. At the time, the Commission cited three “key risks”, being significant losses in a very short time, significant losses over a prolonged period and “financial vulnerability”.

In a speech in Autumn 2021, a Commission official stated “We continue to see example after example of operators who have allowed people to gamble amounts that clearly place customers at risk of harm with very limited or no customer interaction until a very late stage. Just to be clear, we are not talking about grey areas here. We are talking about significant binge gambling or clearly unaffordable levels of gambling without action being taken”.

At the time, we considered this to be a retreat from the position in the 2020 Enforcement Report and a far clearer reflection of the regulatory objective. Yet, in our experience in advising in the context of enforcement case work, this simply was not reflected in the Commission’s interactions with its licensees. We continued to see clear indications in compliance assessments that (at least some of) the Commission’s compliance officials consider it a failing not to obtain evidence that customers could afford to spend a few hundred pounds. Once pressed, though, this position becomes difficult for the regulator to substantiate.

We sincerely hope the White Paper is the beginning of a process that will promote consistency across the Commission with a clear set of objectives and associated requirements. We welcome the approach the White Paper is mandating, with clarity on when in the customer journey things need to happen. But, as will be seen below, the peril for the industry and the potential ongoing risk to the consumer is the potential that uncertainty may remain over what actually needs to happen when thresholds are reached.

How did the Government approach this issue?

The Call for Evidence had flagged the concern at cases of gamblers being “able to spend large sums of money they couldn’t afford in short periods of time without intervention from operators”. But it was unclear what that meant in practice.

In late 2021, the-then Gambling Minister addressed an audience at the annual GambleAware conference in London in which he signalled that “proportionate” affordability checks will be one of the results of the government’s review of gambling legislation. He made clear that demanding financial information from customers spending £100 on gambling would be “unwelcome, disruptive and disproportionate”.

As such, it was expected that the White Paper would seek to find “balance” between consumer protection and consumer freedom at a place that would be less disruptive to the general gambling consumer (as opposed to the at-risk consumer) than might have been the case.

We set out here a summary of the financial risk checks proposed in the White Paper and the principles which underpin them.

Expected impact

The White Paper acknowledges that the “precise impact of these changes will depend on the details which the Gambling Commission will consult on shortly”, and there remains much room for movement on how impactful the changes will actually be on both operators and consumers. In particular, the key questions left open for consultation are:

• How will financial vulnerability and enhanced spending checks actually be conducted in practice?
• How must operators respond to certain findings on customers’ financial circumstances?

1. How will financial risk checks actually be conducted?

Financial vulnerability checks

In practice, most major operators are already conducting financial vulnerability screening of customers at earlier stages of the customer journey (including as early as registration) in one way or another through existing tools and services available in the market. These more basic checks use data from different public sources, including ONS socio-economic data, court judgment data and insolvency data, to identify when customers are, or may be, financially vulnerable. Such checks are not capable of identifying all characteristics of financial vulnerability, but operate as an early-stage filter of customers who may be at greater risk of harm even at relatively low levels of spend.

Operators are also generally consistent in how they respond to findings from these checks, with customers identified as a high risk of financial vulnerability (e.g. declared bankruptcies or outstanding CCJs) restricted or blocked altogether. As such, this White Paper proposal will largely codify into regulation what is already happening under existing rules.

Enhanced spending checks

Greater variability comes in how and when checks on higher spending customers are performed, and in the financial limits imposed until such checks can be satisfactorily completed. The White Paper cited “Interventions often come too late or not at all, and…measures are inconsistently applied across the sector”. A desire to address that inconsistency was one of the primary driving forces behind the Government’s proposals, with the promise of “a more prescriptive and risk-based model” intended to remove (or at least reduce) the discretion afforded to operators to determine the levels at which more enhanced financial risk profiling should be conducted to protect consumers from harm wherever they choose to gamble.

However, as we discuss further below, this attempt to level the playing field will only work if the Commission’s forthcoming consultation (and resulting LCCP requirements) makes it very clear what action operators are expected to take when financial checks are completed.

Can credit reference agencies actually deliver enhanced checks?

The White Paper proposes that enhanced spending checks will be conducted, in the vast majority of cases (80-90% of customers), through credit reference agencies (“CRAs”) accessing “personalised data” capable of providing “much greater insight into a customer’s financial situation” and by avoiding the need to seek or insist upon the provision of bank statements or payslips from customers. These checks would be ‘frictionless’, wherever possible, and would not interrupt the customer journey unless the check raised concerns.

Discussions with CRAs, the Information Commissioner’s Office and the Commission, as well as “evidence on the coverage of CRAs and their provision of similar tools to other sectors” led the Government to assume, for the purpose of its financial impact assessment, that “CRAs can provide frictionless enhanced checks for 80% of customers who hit the enhanced spending check thresholds, with half the remainder subject to semi-agreeable checks (e.g. open banking) and the other half (10% of all those who hit the higher thresholds) subject to disagreeable checks” (e.g. those which require bank statements or payslips to be provided).[1]

We are told that the “Commission is currently working with the financial sector to explore how more detailed checks could work”, but it remains far from clear how this will actually work in practice, leaving many scratching their heads about how such checks can actually deliver this level of insight into a person’s financial circumstances without the inevitable friction involved in ‘semi-agreeable’ or ‘disagreeable’ checks.

How do these checks compare with those conducted in other sectors?

No details are given about the nature of “similar tools” available in other sectors, but we assume this references tools used to estimate creditworthiness, disposable income and affordability in the consumer lending industry. CRAs use credit information from various different sources to provide insight into an individual’s financial standing. However, the problems inherent in these types of tools is the inconsistency or absence of reliable income information available to CRAs to allow a proper affordability assessment to be made, particularly wherever access to relevant financial data requires the consent of consumers, as well as inherent challenges in matching credit information to individuals.

The consumer lending industry has data sharing arrangements in place to oversee the sharing of credit information for permitted use cases and which is intended to support responsible lending decisions and reduce fraud. There is no suggestion yet that this will be extended to include use cases such as the enhanced checks for gambling that are proposed in the White Paper, which seems unlikely.

In any event, a recent interim report and discussion paper (published by the FCA in November 2022)[2] identified “significant differences in the credit information held on individuals across the three large credit reference agencies” (Experian, Equifax and TransUnion) and that “market failures and inherent difficulties in matching new credit information can lead to poor outcomes” for consumers. Developments in open banking have enabled larger and challenger CRAs to develop alternative sources of credit information, though products using this source of information are still relatively uncommon, and still bring with them challenges around consumer attitudes and preparedness to share data in this way. It is far from certain that there will be any sort of ‘silver bullet’ solution for these enhanced checks.

Will existing affordability solutions meet the new standards?

The Commission’s drive towards operators conducting ‘affordability assessments’ has already seen CRAs and other third-party service providers innovate to introduce different affordability solutions designed to meet regulatory expectations in the gambling industry. However, the ability to critically assess or compare the reliability of these affordability solutions has been made harder because they are often offered as black boxes, without revealing full details of their methods and data sources. No such solution has been officially sanctioned by the Commission, and the regulator has insisted that operators should caution against placing overreliance on affordability estimates provided by third parties, preferring instead that operators collect bank statements and payslips directly from customers to support continued spend.

Will the collection of bank statements and payslips from customers really be a last resort?

The White Paper’s proposals represent a shift away from the Commission’s former position of mandating that customers must provide bank statements/payslips to spend more than the ‘national average’, with consideration of public policy questions of consumer privacy and data minimisation having led the Government to propose that this type of information should only be collected as a ‘last resort’. This approach should be welcomed. The Commission’s own advice to Government acknowledges that ‘A key principle of this work is data minimisation – identifying the minimum necessary data that must be collected from or shared about a small proportion of customers in order to meet the policy aims.’

Yet, as no detail is provided on the framework that is being developed to facilitate the sharing of CRA data to enable these ‘frictionless’ checks to be completed, it remains a possibility that operators will still be expected to collect information from a greater proportion of customers than is contemplated in the White Paper.

2. How must operators respond to certain findings on customers’ financial circumstances?

Quite aside from when, in the customer journey, enhanced checks will be performed, the White Paper reveals little about Government expectations of what operators should actually do once these checks are performed. It expects that operators will need to make an “assessment of whether a customer’s level of spend is likely to be harmful to them”[3] to determine the appropriate “range of actions”. These will include the application of limits, but such assessment will need to take into account the customer’s ‘wider risk profile’ (i.e. the presence or absence of other markers of potential harm and their severity).

The Government’s impact analysis predicts a significant reduction of spending above the enhanced check thresholds by making assumptions about how many checks would flag ‘concerns’ and the likely customer behaviour in response to checks. It predicts that “many people will simply complete the checks and no concerns would be raised” and so would not necessarily lead to reduced spending. In such circumstances, financial limits may not need necessarily be applied. This is consistent with the Government’s stated position that “neither the government nor Gambling Commission will put in place a blanket limit on what percentage of income a customer can gamble”.

How will operators respond to ‘concerns’ identified?

However, where ‘concerns’ are identified, or where the checks cannot be completed, the presumption seems to be that customers will be prevented from gambling further (though it may be that any resulting limit could allow for further gambling within a defined limit). Of course, determining whether there is a ‘concern’ is not straightforward, even where an enhanced check into a customer’s financial circumstances is carried out, as there are no objective measures of what financial harm, in the context of gambling, actually looks like.[4]

Nor is it clear how any perceived risk of financial harm should be assessed or risk-weighted alongside the range of other indicators of potential harm. Therein lies the challenge of prescribing what operators must do when enhanced checks are carried out. There is no one-size fits all approach to perceptions of harmful behaviour. This challenge was acknowledged by the Commission’s in its consultation on SRCP 3.4.3[5] which explained that:

“Some respondents to the consultation considered that the Commission should specify the detailed action that must be taken for every indicator of harm or combination of indicators of harm. This would amount to a detailed set of algorithms set by the Commission and applied by all operators. The Commission considers that this would be disproportionate – it could require very detailed requirements taking account of every permutation of product and consumer risk. We are also conscious that this could lead to a tick-box approach by operators, where some risks and issues were missed as a result.”

How will new rules on enhanced checks sit alongside existing requirements?

It will be interesting to see whether the Commission adopts a similar approach in its forthcoming consultation. Some may call on the Commission to be prescriptive in clearly defining the action that operators must take – e.g. by requiring that operators must set a proportionate financial limit or refuse service altogether if, following an enhanced check, a customer is known or estimated to have lost a defined proportion of their estimated monthly or annual discretionary income gambling (either in a single day/month/year or in a pattern of ‘concerning’ levels of spend). That would seem to be inconsistent with the stated aim that it is not for the Government or the Commission to set universal rules on what proportion of a customer’s income should be permitted to be spent gambling.

Instead, the Commission may favour its outcomes-based approach and set minimum actions that operators must take (e.g. by insisting that they must apply proportionate limits based on the results of enhanced checks to mitigate the risk of harm), but leave it up to operators to determine what an appropriate limit would be. This latter approach would be more consistent with the customer interaction requirements introduced on 12 September 2022 (SRCP 3.4.3 of the LCCP), which require that online operators must tailor the action they take in a way that is proportionate to the potential harm identified, as well as implement automated processes capable of applying limits and restrictions when “strong indicators of harm” are present.

The Commission’s consultation response on SRCP 3.4.3 of the LCCP indicated that the Commission would give “clear guidance on examples of what is expected to be treated as strong indicators” of harm, but the guidance is not yet in force and, in any event, is not clear on what should be treated as a strong indicator of harm. It remains to be seen how these enhanced checks will work alongside SRCP 3.4.3 and whether the Commission will seek to define when customer losses (as a proportion of known or estimated income) should be treated as a “strong indicator of harm”.

The role of an ombudsman in adjudicating disputes related to SR breaches

A failure to define a methodology of how limits should be applied when enhanced checks are carried out will lead to uncertainty and inconsistency in the approach taken by different operators, potentially undermining the protection that is actually afforded to British players.

As we will write about in a future blog piece, such a failure to define a clear methodology may also leave it open to any new Ombudsman to conclude that an operator had breached its social responsibility obligations by setting a financial limit too high following an enhanced check (or not at all) and that a consumer should receive financial compensation as a result of subsequent losses beyond a limit considered to be compliant. Consumer complaints involving social responsibility breaches are frequently more complex and subjective than the clearer-cut cases that have been cited in the now-numerous public statements of the Commission, and it is clearly of paramount importance that clear guidance is given to operators and consumers if an Ombudsman is going to have a role in adjudicating in this difficult area.

3. Enhanced checks and their overlap with AML checks

Given how frequently anti-money laundering obligations have been the subject of Commission enforcement in recent years, it is notable how little attention is given to anti-money laundering in the White Paper.

The Government proposal that enhanced ‘financial circumstances’ checks are performed when customers sustain net losses of £2,000 in any rolling 90-day period will also “give an opportunity to fulfil operators’ wider ‘know your customer’ obligations, for instance by considering customers’ source of wealth and whether that presents any additional risks, for instance if it may be linked to money laundering or other crime.”

There is no doubt that enhanced checks could also serve as a useful tool in identifying and mitigating the money laundering or terrorist financing risks presented by British customers. However, the implicit suggestion that operators would or should be performing source of wealth checks on customers who spend £2,000 in a rolling 90-day period (absent any other reason why a customer would have been identified as a high ML/TF risk sooner) will be read with some surprise.

Insistence on the collection and use of information about a customer’s financial circumstances at earlier stages of the customer relationship would effectively require operators to perform enhanced due diligence (“EDD”) for financial transactions which are several times smaller than the €2,000 threshold enshrined in the UK Money Laundering Regulations (“MLRs”), rendering the risk-based framework created by the MLRs (which seeks to balance the cost burden placed on individual firms and their customers with a realistic assessment of the threat of the firm being used in connection with ML or TF) largely meaningless.[6]

This need for balance is well demonstrated in the Explanatory Memorandum[7] to The Money Laundering Regulations 2007 (“2007 MLRs”) in which the then-Government performed a cost-benefit analysis of imposing a requirement that casinos must verify the identity of customers either on entry or on reaching the €2,000 threshold. At the time, the Government determined that imposing a requirement to perform CDD “on entry” (i.e. on registration) was unnecessary, instead permitting casino operators to defer the application of CDD measures until the point at which customers reach a €2,000 threshold. This approach was considered appropriate in view of the Government’s position that “money laundering in casinos below the sum of €2,000 is not a material risk.”[8]

Some time has now passed since the 2007 MLRs, but it is noteworthy that the Government did not seek to amend the €2,000 threshold when it implemented the current MLRs in 2017, nor did it consider it necessary to narrow the exemption for all gambling service providers from the requirements of the MLRs, except remote and non-remote casinos, “based on evidence that indicated the gambling sector was low risk relative to other sectors.”[9]

Conclusion

The Government has proposed a series of financial risk checks that has some appeal to all sides of the debate. The White Paper states a clear aim of “making online gambling safer” by putting “new obligations on operators to prevent unchecked and unaffordable spending.” However, as we have discussed, there is much still to be debated on financial risk checks and whether the White Paper proposals are achievable.

The White Paper is clear that “new requirements will not come into force until such a time as they are ready” and we all accept there is a significant road ahead, via a series of consultations, that will take the industry and consumers it services to the final destination. The critical consultation, to be conducted by the Commission this Summer, will focus on what actually needs to happen when a check is conducted. With the increasing scepticism about the achievability of “frictionless” checks in this context, the focus will turn towards the expectations on operators when they are unable to procure information about customer’s spending power and at what point they must conduct the “disagreeable” checks the White Paper is trying to ensure are avoided for the vast majority.
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We set out here a summary of the financial risk checks proposed in the White Paper.

References 

[1] White Paper, p.223

[2] https://www.fca.org.uk/publications/market-studies/ms19-1-credit-information-market-study

[3] https://www.gamblingcommission.gov.uk/consultation-response/remote-customer-interaction-consultation-response/proposal-3-our-position-on-requirement-to-act

[4] ibid

[5] ibid

[6] The Commission’s AML Guidance to Casinos explains that the €2,000 threshold (a trigger for CDD, not EDD) is reached where a customer deposits or withdraws €2,000 (or its sterling equivalent) in one or a series of linked transaction and that, for remote casinos, transactions should be considered linked if they are part of the overall activity undertaken by a customer during a single period of being logged on to the operator’s gambling facilities (The prevention of money laundering and combating the financing of terrorism: Guidance for remote and non-remote casinos Fifth edition (Revision 2), February 2021, para, 6.37).

[7] Explanatory Notes to Money Laundering Regulations 2017

[8] ibid, para 1.54

[9] Explanatory Notes to Money Laundering Regulations 2017, at para 8.2