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What gambling firms can learn from financial services

Considerations for firms

British people have gambled for centuries. Gambling was first regulated in 1541 with the Unlawful Games Act, which made almost all gambling illegal, in order to prevent a “decay of the Archery”. Rather than minimise distractions for aspiring soldiers, the current Gambling Act 2005 seeks to prevent gambling from being a source of crime, ensure gambling is conducted in a fair and open way, and protect children and other vulnerable persons from being harmed by gambling.

But in an industry that has evolved away from physical dice and cards to being predominantly online (87% of gambling in 2021), the harms the Act seeks to prevent can take a different form and it has been questioned whether it is still fit for purpose. Whilst the Act has been subject to review, the results have been delayed and the publication date for the anticipated whitepaper is unknown, with even its publication uncertain. Alongside this, the Gambling Commission created by the 2005 Act and fully established in 2007 has faced accusations of being an enabler rather than a regulator and of being captured by gaming lobbyists.

Societal focus on gambling related harms has increased in recent years. The medical profession, the industry, and consumers now better understand the impacts of problem gambling, which has led to calls for change. These calls may become louder as operators navigate an increasingly challenging environment and as consumer vulnerability increases due to the cost-of-living crisis. At the same time, societal expectations of companies are increasing and how companies respond to these challenges, as well as how they report on them as part of the ESG activities and commitments, is increasingly important.

In this regard, operators, the Gambling Commission, and the health service need to work in tandem to help reduce the social harm caused by problem gambling. Gambling disorder is now classified as a mental health condition, and the extent of harm to health and wellbeing is such that the NHS Long Term plan specifically addresses it with a growing network of treatment centres, which experienced record referrals in 2021, and the government acknowledging it as a public health issue. Whilst many efforts are being made to reduce problem gambling and its associated harms, there may be more operators can do to play their role in doing so without waiting for new regulations or legislations.

Based on our experience of working with regulators and regulated firms within the financial services sector, we set out five ways the gambling industry can improve practices and reduce harm, especially to those most vulnerable.

1. Identifying vulnerability and treating vulnerable customers appropriately

 

The historic existence of VIP schemes for frequent customers and inducements to keep losing customers playing fixed odds games indicate that operators are able to use data and technology to identify and benefit from high-spending customers who accumulate losses. As evidence for this, operators who closed their VIP schemes saw revenue from highest spending customers reduced by 55%. Without robust affordability tests, it is these customers who may be at greatest risk of indebtedness. The access to customer data which enabled preferential treatment could be used to establish triggers for intervention and prevent playing, rather than to encourage customers to keep spending. The principles within the Financial Conduct Authority’s (FCA) Consumer Duty which requires firms to demonstrate how they deliver “good customer outcomes” could provide useful guidance to operators in this regard.

Operators can also seek to identify high-risk behaviour, as the FCA has encouraged BNPL firms and others to do, for example spotting out of pattern activity or erratic late night spending, and intervene before it becomes problematic. If this presents a business model challenge for some operators, it may indicate that business models are specifically designed to take advantage of vulnerable customers, which is not how any operator articulates its purpose and mission to stakeholders. Currently, the gambling industry makes 60% of its profits from 5% of its customers. Similarly, when the banking industry was asked to examine where it made money from overdraft charges, it was clear that profits came from those who could least afford it and that they were effectively subsidizing better off, in-credit customers. Whilst the industry has suggested that cutting off customers proactively would push them to black market gambling, the work done around High-Cost Short-Term Credit (HCSTC) indicated that there was not a shift to unregulated lending when pay day lending costs were capped, and that the market and business models adapted to continue to serve a customer base with levels of exclusion not as high as feared.

As levels of vulnerability increase, operators should consider how they identify those who are, or may be, likely to experience vulnerability (i.e. evidence of job loss or ill health) and whether they are considering a sufficiently broad range of characteristics when defining what makes a customer or potential customer vulnerable. Citizens Advice has reported the beginnings of a toxic cycle where people are increasingly gambling in order to try and fix their financial situation.

2. Safeguarding customer balances

 

As individuals deposit funds in gambling accounts, they need to be reassured they are able to be identified and are secure in event of a business failure. The safeguarding regime introduced for payments businesses provides lessons on how this can be done across high growth, technology-enabled businesses. Client asset regimes, subject to audit or assurance work by external parties, exist across banking, asset management, and insurance and seek to ensure protection of client assets held by firms in those industries.

The Gambling Commission sets out the different categories for operators arrangements for holding customer balances and the varying protections they have in insolvency, ranging from none to the protections of a trust account. In their reporting, some operators hold customer balances within their trade creditors and an equivalent amount within their cash balances. Operators could increase transparency to customers and broader stakeholders in relation to how customer money is treated if some of the practices from the financial services industry were adopted. Experience from the financial services industry shows the benefits of properly segregated and safeguarded client monies for resilient and trusted businesses.

3. Mindful and accountable use of new technology

 

A key factor in the increase in harm is the way we gamble. Technology enables betting and gaming more quickly, easily, and flexibly than ever before. The rise of online gambling has seen a shift away from in person play with others and social interaction, with 95% of online gambling taking place from home. This shift creates an environment of increased risk for problematic behaviour, without the physical oversight of staff with a duty of care (as in a casino or bookmakers) or friends to help rein in problem behaviour. The use of gamification and AI allows operators to use behavioural biases to induce further gambling and enable addictive behaviour. The FCA’s paper on similar risks in trading sets out an understanding of how this happens and some good practice.

In its recent letter to Contracts for Difference (CFD) firms, the FCA asked firms to consider the conflict of interest inherent in their business model where they profit from customer losses and encourage excessive risk taking and how these conflicts are managed adequately.

The financial services regulator’s approach to the use of AI and accountability for the use of AI is also worth consideration by gaming operators, particularly as forthcoming corporate governance changes will seek to establish greater accountability of directors. As operators increasingly identify as technology companies, they have an opportunity to help lead and shape best practice for responsible and ethical use of artificial intelligence.

4. Information sharing and third-party data

 

Whilst operators conduct affordability checks and impose limits on deposits for some customers, this is done in a variety of ways. A more stringent and structured affordability test which considers objective aspects of vulnerability, for example age, applied consistently across operators would reduce the conflict of interest which could incentivize operators to allow individuals to overextend themselves. Previous proposals, which have yet to be taken forward, like the use of a Single Customer View (SCV), would allow greater access to information across the industry and enable operators to take more informed decisions in the interests of customers.

Effective affordability checks would also enable operators to take a nuanced approach to customers. Rather than VIP becoming synonymous with compulsive or problematic behaviour, an approach enabling high-net-worth individuals (HNWI) to take a higher level of risk could be developed to better understand and target risk-taking behaviour, which creates financial and other problems which are difficult to overcome.

Operators could also work with credit referencing agencies to reduce the reliance of self-exclusion, seen by some as outsourcing risk management to the less informed and vulnerable, which appears insufficient to reduce harm.

There may also be a role for banks and payment providers to use customer information to spot and help to address harms through customer nudges and information sharing. Banks and other financial services businesses increasingly provide an array of prompts for app users to promote the existence of support services or to help with budgeting.

5. Growing the community and social aspects of gambling

 

Alongside the large household name operators, there are an increasing number of new operators who are seeking to make a success of a more social type of gambling which does not rely on fixed odds and asymmetry of information. These peer-to-peer, commission-based businesses allow players to bet against each other or pool potential winnings within a broader group.

This practice goes some way to limit the potential downsides of a gambling loss while incentivizing firms to act with customer interests at heart, as firms do not win if the customer loses. Historically, platforms which supported peer-to-peer gambling existed but were phased out due to the greater profitability of fixed odds gambling products. These games seem to better meet the stated aims gaming firms have of bringing moment of excitement to their customers while also creating better customer outcomes.

Much like the approach to innovation in financial services through sandboxes and support to experiment, operators need safe spaces to experiment with other ways of doing business, particularly where these may not be immediately profitable, and the underlying business model means they will have to compete in a different way. Regulation and legislation should not only seek to reduce the harm currently brought about by the gambling industry, but also imagine what a better industry might look like and how its creation might be incentivized.