In September 2020, the Gambling Commission published strict new guidance setting out the minimum standards it expects licensees to adopt and evidence in policies, procedures and practices to mitigate the risks of incentivising high value customers (HVCs) (the Guidance). The Guidance can be accessed here and the consultation response (which we suggest licensees read in full if they have not already done so) can be found here.
These changes relate to HVC schemes, in which personalised or tailored incentives are linked to high value spend or frequency of play. Licensees must implement changes to take account of the Guidance by 31 October 2020. As such, we expect the majority of licensees to be in the process of finalising the necessary changes to their policies, procedures and practices. However, with the Guidance extending to seven pages of detailed requirements and there still being significant scope for interpretation, and uncertainty as to how exactly licensees are expected to comply, below we explore some of the challenges that may arise during the implementation phase.
There is no substitute for reading the Guidance in full and we would suggest even those licensees to whom the Guidance does not apply to take heed of the direction of travel in relation to the management of customers that the Gambling Commission perceives as higher risk. This is particularly pertinent given the impending launch of the Gambling Commission's consultation on customer interaction which will focus (amongst other things) on the assessment of affordability and identification of vulnerability (both of which are addressed within this new Guidance and are likely to reappear in the same or similar guise as part of that upcoming consultation).
Know your customer – assessing and mitigating risk
It is clear from the Guidance that the Gambling Commission's view is that licensees should treat all HVCs as higher risk due to their high levels of engagement by frequency, spend or both. As such, the Gambling Commission expects licensees (as a minimum) to be able to evidence that affordability, safer gambling and enhanced due diligence checks are undertaken before making any customer a HVC, and on an ongoing basis.
From an implementation perspective, the anticipated nature of these checks is noteworthy because:
- Affordability – the Gambling Commission expects licensees to establish and verify (i.e. by reference to documentary evidence or other independent sources of information) that the HVC's spending is affordable and sustainable as part of their "leisure spend". This necessitates the gathering of information regarding the customer's overall level of income – but it also necessitates an understanding of the customer's outgoings to determine what the customer is likely to have left to spend on leisure activities, including gambling.
Licensees must therefore consider what information they will need to ask from customers before they may be categorised as a HVC. In determining what information should be sought, we recommend that licensees revisit the section of the Gambling Commission's enforcement report 2018/19 headed 'Affordability and consumer protection'. In particular, this section serves a useful reminder of the outgoings that are generally taken into account in determining "disposable income" (i.e. taxes, accommodation, utilities and food costs).
During the course of an assessment of affordability, the Guidance urges licensees to be "cautious" when considering funds derived from unplanned financial windfalls, including from gambling or other sources such as redundancy or inheritance. Whilst the reason for exercising caution when a customer's funds derive from redundancy is clear, the reasons for exercising caution in cases where funds derive from gambling or inheritance are perhaps less immediately obvious. In any case, the key to an assessment of sustainability of a customer's leisure spend will depend on the level of income from the source identified, the anticipated level of spend by the customer concerned and any future changes (increases) in spend. The concern with funds from an "unplanned financial windfall" from gambling is therefore likely to be associated with the fact that such income may not be repeated and may not therefore be sustainable (depending on the circumstances).
While the requirement to consider affordability echoes the customer interaction guidance published last year, the requirement to take all reasonable steps to verify the information takes the existing requirements a significant step further, at least in relation to customers designated as HVCs. Licensees will therefore need to consider what documentary evidence they should seek from their HVCs and/or what independent sources of information they may be able to consult as part of the assessment of a customer's affordability.
- Safer Gambling – licensees will be accustomed to assessing whether there is evidence of gambling related harm but assessing heightened risks linked to the vulnerabilities outlined in the Guidance (i.e. physical or mental health problems or impairment, side effects from injury, medication or addiction, financial difficulties, domestic or financial abuse, life changes or changes in circumstances and where an individual has a "higher than standard level of trust or high appetite for risk") and verifying that information, is likely to be more challenging.
The Guidance is not prescriptive in this regard. It does not provide details as to how licensees are to conduct these checks. That said, the Guidance anticipates licensees being held accountable for information they "hold or could have reasonably obtained". The presumption is that licensees will therefore be expected to ask certain questions about a customer's personal circumstances, rather than relying on information being disclosed to them in the ordinary course of customer interactions.
Verification of information would usually be accomplished through obtaining documentary evidence or seeking confirmation through an independent source of information. However, it is difficult to see how verification of this kind of information might be achieved (whether verifying the existence of such vulnerabilities or verifying that those vulnerabilities do not exist). The Gambling Commission provides no further guidance or suggestions on this topic and so licensees will need to take a view as to whether verification of the information is possible and, more importantly, if the customer displays any of the vulnerabilities set out in the Guidance, whether they should be given HVC status. Keeping detailed records of the decision-making process at each stage, including the reasons why each decision was made, will be imperative.
- Enhanced due diligence – the requirement to maintain up to date evidence relating to the occupation of HVCs is likely to require a number of licensees to implement new additional checks to establish the occupation of customers that they would like to categorise as a HVC. Licensees will also need to establish procedures to regularly check that such information has not changed.
For those licensees who are not currently subject to the Money Laundering Regulations (i.e. those who do not hold a casino operating licence) the new requirement to undertake source of funds checks on all HVCs is likely to require greater efforts to implement (including the preparation of policies and procedures outlining the procedure by which a customer's source of funds is to be established and verified at the outset and on an ongoing basis, and staff training).
The Guidance states that "source of funds checks should provide clarification over the actual source of the funds used to gamble rather than an open source assessment of potential income/wealth". We interpret this as a clarification that licensees are expected to undertake source of funds checks rather than source of wealth checks (although licensees may nonetheless also choose to implement source of wealth checks to assist in assessing the affordability of a customer and the sustainability of their leisure spend).
While the Gambling Commission does not cite a heightened risk of money laundering in relation to HVCs as being the driver behind the requirement to undertake source of funds checks, the interplay between responsible gambling and AML is not a new concept. In assessing the source of funds information provided to them by HVCs, licensees must be aware any potential money laundering or terrorist financing risks or red flags that the information may reveal, ensure that the relevant teams can collaborate effectively and report any suspicious activity.
Requirements where information is not provided
Where a customer is "unable or unwilling" to provide the information required as part of the licensee's affordability, safer gambling or enhanced due diligence checks, the Guidance provides that the customer should not be considered eligible for HVC incentives and licensees should "consider the regulatory risk posed" by continuing the customer relationship. The appropriate decision regarding continuation of the customer relationship will inevitably depend on the nature of the information that has not been forthcoming. Given the sensitive nature of some of the information that the Gambling Commission anticipates licensees collecting it is entirely possible that the number of customers enrolled in HVC scheme will drop further (having apparently already dropped by 70% since the Gambling Commission challenged the industry to get "its house in order" last year). To the extent that relationships with those customers continue, we would expect those relationships to be managed much more proactively by licensees in terms of implementing financial and/or time limits etc. to mitigate any ongoing risks to the licensing objectives.
Oversight and accountability
Licensees will need to consider carefully which PML holder is best placed to be accountable for the HVC scheme's compliance. The answer to this question is going to depend on the size and nature of the business, its current management structure and how the licensee proposes to ensure that the relevant individual has the required level of oversight over the teams involved in operating the HVC scheme, including the relevant compliance teams.
Licensees with multiple brands and/or HVC reward schemes will also need to consider how oversight can be managed across the business, particularly because the Guidance stipulates that any review of an HVC's activity "should include all accounts the individual has with the licensee or related group licensees irrespective of brand and sector". Operators will need to think carefully about governance structures and processes, including at board level, and ensure processes are in place to ensure regular communication between customer relationship and compliance teams, including teams working for different brands operated by the same licensee (if applicable).
Licensees will also need to consider how to ensure that no customer contact is conducted outside the licensee's policies, procedures and systems. We anticipate that this will, in part, be addressed by ensuring that the relevant policies and procedures are appropriately drawn to take account of the types of contact that the licensee's staff ordinarily have with their HVCs and, in part through staff training.
Relationship management
The Guidance states that customer contact should be conducted in a professional and transparent manner and, where possible, colleagues that look after specific HVCs should be rotated to ensure objectivity in decision-making is maintained.
Whilst this proposal drew a range of responses during the consultation, including those who suggested that account managers responsible for individual customers were more likely to be able to spot changes in a customer's speech and behaviour, the Gambling Commission's position is that with the gathering of a more complete profile of a HVC's behaviour and spending habits, and the maintenance of full audit trails and records of decisions, staff rotation should "pose less of a concern".
The benefits of consistent HVC relationship management (including the benefit of HVCs being more likely to share sensitive information about their personal, situational or behavioural vulnerabilities with people they know well) will need to be balanced with ensuring that the licensee can demonstrate that the objectivity in decision-making is maintained. This is likely to be achieved through a combination of rotation (where possible) or peer reviews of HVC accounts, and audit and assurance functions.
Use of incentives
The Guidance provides that the actions and behaviour of staff must not exploit vulnerabilities, including by "engaging in contact which goes beyond a professional level to become one of friend or confidant". Much like the suggestion that those who look after specific HVCs should be rotated where possible, this requirement will need to be navigated carefully. The line between professional and friend in the management of HVCs is one that will be challenging to tread and will no doubt result in a number of licensees reassessing the role of their HVC relationship managers and a resetting of expectations and boundaries through policy and procedure updates and training.
Conclusion
Licensees may initially have been relieved to learn that the Gambling Commission had not bowed to pressure and followed calls for a ban on all VIP schemes or a prohibition on the recruitment of under 25s to VIP schemes.
However, despite not formalising some of the more extreme suggestions from external groups, it is clear that the Gambling Commission was keen to bring pressure to bear on licensees with this Guidance. The Guidance is onerous and will require significant investment in time and resource in order to implement, and to ensure ongoing compliance – which, in practice, may be difficult, and in some cases impossible, to achieve. The appetite of licensees to make the investment will vary and depend largely on their reliance on HVCs, the nature of their schemes and the extent of the changes needed in order to change their policies, procedures and controls.
The Gambling Commission has indicated that it will be left with no choice but to ban HVC schemes if significant improvements are not made. Licensees can therefore expect the Gambling Commission to take proactive steps to monitor the implementation of the Guidance through its usual means and, given the onerous nature of the Guidance, we consider it likely that enforcement action will follow.
If you have any questions about the Guidance or its implementation, please contact your usual contact in the Betting & Gaming team.