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The impact of the new UK licencing regime upon the future of online poker in general – and grey markets in particular – has been widely underestimated.

All the larger white market operators will pursue a UK licence. Their ability to choose their own regulator is about to end.

And all indications are that acquiring this UK licence will require operators to exit some grey markets (markets where the legality of online poker is questionable), meaning that players in those markets – among the biggest in the online poker industry – will lose access to the largest, most respected sites.

This will in turn open up opportunities for those willing to take the risk of serving the grey/black market.

In short: the market is about to rapidly and definitively polarise between the white market operators and grey/black market providers.

This bold prediction takes some explaining. So let’s explore:

  • Why the UK market is more important than many realise.
  • What the UK Act does (and does NOT do).
  • The UK rules for grey markets.
  • How the market for internationally pooled players is regulated today.
  • How the international pool has changed in recent years as regulators have fragmented the market.

The importance of the UK market

The UK market is the most open and developed remote gambling market anywhere in the world. Advertising is permitted, and revenues are significant:

  • A 2014 report from Deloitte put the 2013 GGY of UK online poker at £329m ($559m), with the total UK market for online gambling topping £2.5bn.
  • PokerStars net gaming revenue from the UK in 2011 was estimated at £100m ($170m) by GamblingData.com.

The wider gambling picture shows the UK market as 8% of the global market (per H2 Gambling Capital) which compares to:

  • 10% for the US.
  • 3% North America (excl US).
  • 32% for Asia.
  • 37% for Europe (excl UK).
  • 10% for Rest of the World.

Bottom line: any firm seeking to serve white markets, to be a 100% legitimate international remote gambling provider, needs to be in the UK market.

UK regulation and grey markets

What the new UK Act does

Full text of the Gambling (Licensing and Advertising) Act 2014.

It is a deceptively simple and short Act of Parliament that had cross party support. Not one British MP opposed the new Act even though many tried to add to it. In essence it requires that:

  • All remote gambling operators serving UK customers must have a UK licence.
  • B2B poker operators (Playtech, Microgaming) have to have a UK licence to serve UK customers.
  • Remote gambling software has to be supplied by UK licenced software firms.
  • The Act also adds powers for the UK government to impose a levy on horseracing revenues on foreign based firms.

Now a lot of other rules come with these licences – the Licence Conditions and Code of Practice (LCCP) apply in full but the changes themselves are pretty simple: if you serve the UK market, you need a UK licence.

What the Act does NOT do

This new Act does not impose a Point of Consumption(PoC) Tax. The industry and media comment has focused on the proposed 15% GGY (15% net poker revenues) tax as this is a significant and controversial impact upon the industry.

A 15% GGY tax levy will be applied on UK customer generated revenues, with no levy on revenues from outside the UK. Poker has a significant carve out so that the tax is on net charges, post rakeback or VIP programmes.

That tax is coming – but it is not part of the Act. The tax will apply to licence holders, and whilst the Act changes who has to have a licence it does not alter the tax regime.

The tax change is separate and was consulted on separately.

The tax issue has meant that commentators have missed the other impacts of the Act itself. Tax seemed more important and more immediate.

Background on the UK’s approach to grey markets

The UK government has a legal power to ban anyone in the UK (including UK licence holders) from serving a named foreign market. That ban makes doing so a criminal offence.

Section 44 of the 2005 Gambling Act is the relevant law,  but the punishment has not been set out. The power has never been used by the UK government – there are no foreign markets that the UK government bans outright, even though they have that power (see my FOI request and the government’s response).

The Gambling Commission (UKGC) is similarly coy in their FAQ on the new licence:

14 Will the Commission issue a list of jurisdictions into which licensed operators must cease supply?

14.1 No, the Commission expects operators to conduct their own due diligence and put controls in place to ensure they meet legal requirements in other jurisdictions.

As ever the devil is in the details. But that detail has become a bit clearer recently.

Approach to grey markets post-licensing

Essentially, it’s looking as if the UKGC will not allow UK licence holders to have significant exposure to grey markets.

Further, they will likely not grant a licence to anyone serving a black market where the remote gambling is illegal.

To have a UK Licence and operate in any grey market the operator must supply a legal rationale for operating in said markets to the UKGC.

This requirement is automatically triggered for any market that generates 3% or more of a company’s revenues (10% for very small applicants) or for any market that an operator actively “targets” regardless of revenue:

14.5 For each of these markets, the Commission will ask operators why they think provision of gambling facilities is not illegal either because they are licensed to operate in that jurisdiction or because they have satisfied themselves that it is not illegal for them to provide gambling facilities to those players. If businesses are relying on legal advice as part of evidence of responsible due diligence we will expect businesses to tell us who they have been advised by – we will not expect to see legal opinions as such but will wish to understand the legal rationale.

It could be difficult to find a legal rationale for some popular markets (Australia, Russia and South Africa come to mind). There may be some legal wiggle room for other significant markets that lack a clear regulatory scheme for online gambling (think Canada, Germany and even Sweden, Finland or others in the EU).

But legal handicapping aside, the requirement is clear – if you do not have legal justification then you can’t operate in that market and have a UK licence.

The 3% of revenue hurdle for deceleration of grey market involvement seems odd at first but it is a mixture of administrative convenience and an assessment of risk.

The UKGC does not want legal rationales for every market in the world from every supplier but they are (rightly) concerned about grey markets given the Full Tilt debacle. That event made it clear that grey market operation combined with dubious management can impact consumers and embarrass regulators.

That regulatory circle is squared by requiring the same legal justification for markets that are “targeted” but below 3% of revenue.

It is a catch all for the licensee that stops the 3% limit being a free pass for (small) grey markets. If sites use the local currency, advertise there, use the local language or target those consumers then they need to have legal justification to do so.

And, to top it all off, some measure of pro-activity in excluding grey market players is required:

14.7 ..we [UKGC] would expect a responsible operator to assess the consequences of their continuing to receive a noticeable stream of income from any jurisdiction where there are real doubts about the  legality of their providing gambling services to its population. We would not expect the operator to continue to supply those services without considering the applicability and enforceability of such laws to both operator and player. Where no justifiable arguments exist to continue with such activities, we would expect the operator to make reasonable attempts to stop such access. Clearly in such circumstances should an operator not take reasonable steps to stop such access it may reflect on their integrity and therefore continuing suitability. We accept there will always be some players who deliberately flout domestic legislation but responsible operators could be expected to take reasonable steps to discourage this.

The slow death of regulators of convenience

It used to be that firms could operate in the UK after choosing a regulator from either a “white list” jurisdiction (Isle of Man, Alderney, Antigua/Bermuda and from 2008 Tasmania) or an EU jurisdiction (Gibraltar, Malta).

The listed firms (William Hill, Ladbrokes, Party) chose Gibraltar. But Gibraltar was not OK with US facing firms so PokerStars chose the Isle of Man and pre-Black Friday Full Tilt chose Alderney.

It is important to note that these regulators of international gambling have insignificant domestic markets. The value of the licence was in allowing access to other markets with a relatively low tax or regulatory burden combined with reassurance to customers about the site.

The model that Gibraltar personifies of low tax but regulatory access to EU markets has been under pressure for years.

As significant markets decided to reject international regulation, and with that international poker player pools, the value of the licence from a tiny jurisdiction fell. France, Spain, Italy, Belgium and soon Switzerland and Portugal have chosen to ring fence their players in order to tax them. In turn, access to those markets via a flag of convenience has been lost.

This segmentation has changed significant grey markets to being white/black markets: if you have a licence then it is white. If not, black. That undercuts the value of the small jurisdiction international licence.

Worse for Gibraltar is that most of the big firms based there are UK facing and/or UK listed (William Hill, Ladbrokes, Victor Chandler, Bwin.Party, BetFair).

For all these firms, the UK licence that allows access to the UK market, other white markets, grey markets with a legal rationale and is a credible boost towards achieving other national licences becomes vital. Meanwhile, the Gibraltar licence that requires operations to be based in Gibraltar becomes peripheral, an additional expense and restriction of operation with no clear advantage over the UK licence.

The UK ultimatum

In the new era, larger operators face a stark choice:

  • Pull out of the UK market in order to continue serving grey markets, or;
  • Stay in the UK market and stop operating in most grey markets, at least any that are targeted or are significant to them in terms of revenue.

For most that choice is fairly easy. The UK market is too important to them to give up on it.

For poker there is also the longer term opportunity of the UK approach. By having an open international market and player pool but also taxing their own UK market, the UK model offers an opportunity to reunite the European market and end the segregation of the EU player pool.

For larger poker operators that opportunity has to be seized.

PokerStars has sought to comply with national regulators at every opportunity. They have accepted the segmentation and the high taxation (whilst lobbying against it) because the long term advantage is to operate in the white markets – all of them.

UKGC: Meet the new global online poker regulator

The UK regulatory changes mean that the poker market will polarise. The larger more legitimate and listed firms will accept the UK’s new lead regulatory role.

The UK regulates almost no online poker today. Post October the 1st 2014, it will be regulating the vast majority of it .

In Barcelona last week Jenny Williams (UKGC Commissioner and Chief Executive) made clear that she is expecting about 150 licence applications in the next few weeks.

These will include the previously unlicenced poker networks operating as Business to Business (B2B) operations, most of the Business to Consumer B2C poker skins using them and standalone sites like PokerStars and Full Tilt.

Almost overnight, the UKGC will become the dominant regulator of global online poker.

There will be a steep learning curve for the UKGC. But the change is happening. And the impact will be as unavoidable as it is substantial.

- Follow Richard on Twitter or via his posts on TwoPlusTwo.
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