HomeInsightsHigh-Value Customer schemes – finding the balance between commercial objectives and consumer safety

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In recent weeks we have seen three Parliamentary reports published which will all play a critical role in shaping the future of gambling regulation in Great Britain (and possibly beyond). Each report’s vision for the future of the gambling industry varies in its tone and coherence, but they present clear themes which we expect will dominate much of the policy debates that will take place when the formal government review of the Gambling Act eventually commences. These include familiar areas such as advertising, ‘affordability’ checks, online limits and, which forms the focus of this blog, responsible product design, as well as recommendations to impose a new ‘duty of care’ on operators and to categorise loot boxes as gambling once and for all.

Following recent articles on the role of the regulator and responsible game design, there follows the third in Wiggin’s series of posts that will examine these key trends.

In this article, we assess the recent consultation on “High-Value Customers” or “VIPs”.

Amongst the various consultations being undertaken by the Gambling Commission (the “Commission”) this year, perhaps the clearest illustration of the complexities of the ongoing debate about the objectives of gambling regulation, is the “Consultation on High-Value Customers“, (the “Consultation”) which opened in June and closed in the middle of August.  While we await the output of that consultation, it is an opportune time to reflect on an issue that attracts a variety of opinions and one which is neatly summarised by the Commission’s assessment in the Progress Update it published alongside the Consultation, where the regulator succinctly notes that: – “the approach to so-called VIP programmes has been the focus of attention given the tension between commercial objectives and consumer safety”.

The term High-Value Customers or “HVCs” is used by Commission.  It is notable that in the recent House of Lords report, “VIP”, “High-Value Customer”, “Managed Customers” are all used to describe what the Commission, in its introduction to the consultation, describe as “individuals whose gambling custom is of exceptional commercial value to licensees”.  For the purpose of this article, we will refer to them as “HVCs”, in keeping with the Commission’s terminology in the Consultation. In this article, we consider the key regulatory challenges the industry faces, consider the potential solutions to them and also comment on the complexities of balancing commercial value with consumer protection.

First, we focus on recent Parliamentary output. Any gambling regulatory issue these days cannot be considered without a reflection on the political noise surrounding the industry.

The Political Backdrop

Anyone who has read both the APPG report and the House of Lords’ report, cannot fail to contrast the style and the quality of the two but one is also struck by a general consistency of approach and recommendations across a number of areas.  However, a very clear difference between the two reports is in their recommendations regarding how HVC schemes should be addressed.

The APPG Report states: –

We recommend that VIP accounts and incentives should be banned.  Rather than relying on the industry, the Gambling Commission must act decisively and take steps to ban highly problematic VIP schemes.  The Gambling Commission itself has identified the dependence of the gambling industry on VIP customers who are disproportionately likely to be addicts.  We are concerned with fines to companies for offering inducement inappropriately have very little impact on this well-resourced and well-funded industry”.

In contrast, The House of Lords Report recommends: –

  • “Licence conditions for gambling operators should be amended to require them to undertake a thorough affordability and source of funds check before admitting any new customer to a VIP scheme. Such customers must be at least 25 years old.
  • It should be a condition of an operator’s licence that the salaries and bonuses of employees of the operator, its subsidiaries or affiliates should not in any way depend on the length of time or frequency that a customer they are first in contact with gambles or the amount spent or lost or the profit made by the operator from that customer. “

As such, we see a report from the APPG which seeks to ban HVC schemes entirely but one from the House of Lords which advocates a higher level of regulation around them, recognising the significant risk to consumers that arise from them, but also noting that such schemes “give special treatment to those who gamble large sums. If they can afford to do so, this does not necessarily cause harm”.

The House of Lords also demanded the Commission “closely monitor the working of the interim measures for the regulation of VIP schemes while it consults urgently on changes to the LCCP for the permanent regulation of such schemes”.

The “interim measures” that the House of Lords refer to were those that the industry itself agreed to adopt following the working group on HVC schemes.  In October 2019, the Commission launched an initiative which, to use Neil McArthur’s words in subsequent speeches “has the capacity to deliver real and rapid change for consumers in key areas of risk”. He implored the industry to collaborate to address three core issues, one of which was the Incentivisation of HVCs. The Commission was concerned that even though licensing conditions expressly required operators to maintain policies and procedures to mitigate the risks associated with high-spending customers, “the evidence from enforcement work, compliance work and consumer feedback suggests that current requirements are not effective”.

The industry agreed to: –

  • restrict and prevent customers under 25 years of age from being recruited to High-Value Customer schemes;
  • ensure that all customers must first pass through checks relating to spend, safer gambling and enhanced due diligence before becoming eligible for such a scheme; and
  • ensure that reward programmes will be required to have full audit trails detailing decision making with specific senior oversight and accountability.

The House of Lords recognise these as “interim” measures urgently put in place while we await the outcome of the Consultation.

The Commission’s Response

The risks associated with HVC schemes that have been identified during the APPG and the House of Lords enquiries, unsurprisingly flow into the Consultation and, importantly, are enshrined in the draft Industry Guidance for High-Value Customers (“Draft HVC Guidance”). Once finalised, this will form part of a proposed amended licence condition. This guidance builds in the interim measures mentioned above which the working group had agreed the Betting and Gaming Council (“BGC”) members would comply of as of 1st April.

In the Consultation, the Commission rightly identify the complexities around what constitutes a high-value customer and attempts to identify such by reference to the type of treatment that they will receive (which will include hospitality, personal account management and individualised bonuses and benefits).  As indicated above, the industry adopts a variety of approaches and terminology, but the key principles are probably the same across the board in that a relatively small number of high spending customers will receive a more bespoke service.  This is encapsulated well by Conor Grant (then COO of Sky Betting and Gaming) who told the House of Lords’ enquiry that “the reality is that there are people who can afford to spend more on gambling.  As in any commercial enterprise, those customers expect a different level of service.  We are providing that.

The APPG does not agree that gamblers should receive any personalised service as would be the case with a general HVC scheme.  In contrast, the House of Lords and the Commission take a different approach, each concluding that there is a place for a more personalised service in such a way that would reward loyalty and seek to retain custom.  Comparisons with loyalty schemes in other industries, generally, can be difficult to sustain sometimes on the basis that many of them will not be accompanied by the potential harm to the consumer.  However, the comparison is valid insofar as businesses should be entitled to retain loyal customers provided they are able to demonstrate a capability of doing so in such a way that identifies and mitigates any risk to those customers as much as is possible.  It is that challenge that the industry has sought to address in its working groups during late 2019/early 2020 and that the Commission is now consulting on.

There are some interesting aspects of the Draft HVC Guidance which are worth further consideration.

Knowing Your Customer

The Commission states that “HVCs pose a heightened risk due to their high levels of engagement by frequency, spend or both.  For a licensee to accept and incentivise an HVCs custom they need to demonstrate how they have assessed and mitigated that heightened risk at the outset of the customer relationship and on an ongoing basis.

In doing this, the operator will need to establish that the customer can actually afford and sustain that spend, assess whether there is evidence of any gambling related harm and ensure that they have up to date enhanced due diligence relating to the customer’s source of funding.

There have been a succession of enforcement cases going through the Commission which have identified high spending customers who were given “VIP treatment” who, it later transpired, were stealing money to fund their gambling.  Such situations are a combination of regulatory failings at the relevant operators and the Draft HVC Guidance is designed to address this by ensuring that both the money laundering and the safer gambling challenges are met by any HVC scheme and will continue to be so. As such, it is clear the Commission, rightly, sees the issues raised by HVC schemes to go beyond safer gambling and also encompass money laundering risks.

However, the Draft HVC Guidance then states: –

Licensees should be taking steps to ensure all customers are gambling with money they can afford to lose (lawfully acquired disposable income).

This may seem reasonable, but actually, to the trained eye, could be attempting to impose a requirement that operators ensure they can demonstrate the legitimate origin of every pound they receive from their entire customer base.  This would involve an interpretation of the Proceeds of Crime Act/anti-money laundering regulations that requires the gambling industry to operate a risk-free approach to money laundering rather than the statutorily decreed risk-based approach.  Surely the Commission is not intending to use the HVC Consultation to seek to impose a higher AML burden on the industry than is imposed by POCA (which enshrines the principal money laundering offences in the UK)?

Oversight and Accountability

The Commission’s case work has identified a relevant systemic failing across the industry for a number of years where “VIP managers” have been able to operate largely unchecked by the legal and compliance teams of gambling operators.  The clear conflict that they are in, encapsulated by the Commission’s clear reference to the “tension between commercial objectives and customer safety” has endured for too long.  It would be unfair to say that this is uniform across the industry, because it is our experience that that is not the case.  However, it has been too common in compliance assessments to encounter customers who have a history of regular contact with the HVC teams within operators who themselves appears to have limited oversight by the responsible gambling or wider compliance teams.  This harks back to the time when the marketing teams within gambling operators held a disproportionate amount of power, certainly more than the compliance team held and indicates an operator who has been too slow to recognise a change in priorities.

By enshrining an obligation for there to be senior PML oversight of any HVC scheme, the Commission are really seeking to reinforce senior accountability that already exists. Going forward, though, those who hold personal management licences with responsibility for overseeing HVC schemes really need to step up to the plate and adopt a first-line oversight over the compliance with the HVC guidance once it is published. One is reminded of the warning given by Neil McArthur’s predecessor in 2017 when she said “we are at a tipping point, and those who do not deliver for the consumer will find themselves in an uncomfortable position, with their future in this industry increasingly in peril.”

With the Commission on the receiving end of a stinging rebuke from the House of Lords for not using its powers to revoke licences as much as it should, PML holders overseeing HVC schemes should consider themselves in the spotlight for some time.

Use of Incentives

It is unlikely that anyone in the industry would have an issue with a phrase in the draft code that “HVC incentives should not be used to exploit vulnerable customers or to encourage problematic behaviour”.  The Commission continues that “incentivisation methods do not encourage risk behaviour such as chasing losses, excessive time or money spent gambling, the time of incentives is not linked to periods of excessive play or significant losses and that incentives are proportionate to a customer’s spending pattern”. Any incentivisation must be “responsible” and it is with this in mind we see significant challenges for the industry to find the right balance between rewarding loyalty but not incentivising customers to play in such a way that could, with an objective view, be considered to be stimulating or encouraging potential problematic behaviour.  By their nature, HVCs are higher risk customers and it will be extremely important for operators to really assess and understand how their HVC schemes are going to work and to understand the impact of the incentives that they offer if they are going to be able to properly demonstrate how they can operate a HVC scheme in a safe way.

What Next?

The Consultation closed on 14th August and the strong recommendation from the House of Lords that the Commission consult “urgently on changes to the LCCP for the permanent regulation of such schemes”, will be ringing in the Commission’s ears.  One would expect to have a relatively quick turnaround for the Consultation but, it will be particularly interesting to see how the Commission’s eventual output responds to, if at all, the stance of the APPG and the “Experts by Experience” group on HVC schemes, whose views are seemingly intertwined.

It is our view that we will end up with an industry code almost identical to Draft HVC Guidance rather than a prohibition. If so, the APPG and the Experts by Experience that collaborate with them will not have achieved one of their stated aims. That will result in not only deep regulatory oversight of HVC schemes but constant external scrutiny which may create yet another avenue for players to instigate complaints and commence actions, supported and encouraged by opportunistic law firms and other activist organisations. As with all regulatory requirements, we would strongly advise the industry to establish a proper governance framework around any HVC scheme that they may operate to ensure that they are able to demonstrate how they are approaching the compliance challenges and how they meet them.

It does feel like the industry has been given a ball it really can’t drop.  There are a number of politicians who would like to see HVC schemes banned entirely and there are a number of vocal and influential Experts by Experience who have personally been affected by the previous lack of oversight by the industry’s VIP teams.  However, regulation should not impose restrictions on an entire sector unless it would be proportionate to do so. As with a number of potential regulatory changes coming down the line, it does not necessarily follow that when a relatively small number of individuals have suffered harm as a result of the industry’s previous lack of sophistication around this complex area, that all customers should be prevented in participating in incentive schemes. The House of Lords acknowledges this.

However, if the industry is shown to be unable to meet the challenges that are being laid down by the House of Lords, particularly, then one could see a difference of approach in the future where the concept of rewarding loyalty becomes something that the legislature simply refuses to permit any more. If operators are unable to find the right balance between commercial objectives and consumer safety, one can expect the regulator or the legislature to step in.