Other Author Alanood Sinjab, Trainee Solicitor
In June 2021, the UK Department for Digital, Culture, Media & Sport commissioned an independent review (the "Review")1 into the regulation of BetIndex Limited ("BetIndex"), following its collapse in March 2021. BetIndex, which operated an online gambling platform called Football Index, had been regulated by the UK Gambling Commission ("UKGC") and not the UK Financial Conduct Authority ("FCA"), but both regulators were the subject of findings and recommendations in the Review. On 13 September 2021, the report of the Review (the "Report") was published.
In this Update, we examine some of the findings of the Review, highlighting the themes that emerge and what might be gleaned from the Review as regards the prevailing regulatory landscape.
In October 2015, BetIndex launched an online gambling platform called Football Index, which enabled players, in essence, to gamble on the future success of football players. Although BetIndex operated under a gambling licence issued by the UKGC (and, being a Jersey company, a gambling licence issued by the Jersey Gambling Commission), many of the features of Football Index resembled platforms for investing in securities on a stock market. Customers or "traders" would buy notional "shares" in footballers, then receive "dividends" paid out by BetIndex on the occurrence of certain events, such as goals scored in an eligible match. BetIndex generated its revenue from sales of new shares and on commissions payable to it on the sale of existing shares.
These stock market-like features of Football Index had been developed over time and were not all present when the gambling licence was granted at the outset of the platform in 2015. It was not until January 2019, when BetIndex applied to the UKGC for a further licence, that the UKGC became aware of the way the platform had evolved. Until then, BetIndex had been assessed and considered as a "small operator" by the UKFC and so had not been proactively monitored by the regulator, but in 2019 it was re-classified as a high impact operator, when its gross gambling yield exceeded £25m for the first time.
In May 2019 and again in February 2020, the UKGC conducted compliance assessments of BetIndex. These brought to light concerns surrounding anti-money laundering, social responsibility, marketing, and the Football Index website, which led to the UKGC in May 2020 conducting a full licence review under section 116 of the Gambling Act 2005.
From May 2019 onwards, the UKGC and the FCA had been in contact with each other regarding BetIndex's activities; in particular, whether all or part of the Football Index platform should properly fall within the regulatory remit of the FCA as well as that of the UKGC. The Report notes that the FCA's initial view, which it had formed in September 2019, was that the platform should be dual-regulated. By February 2020, the FCA's Unauthorised Business Division ("UBD") considered that BetIndex "may not be a case we [the FCA] take forward", although this was not initially communicated to the UKGC. By September 2020, the FCA's position had changed again, and it issued BetIndex with Individual Guidance stating that "the whole BetIndex platform was likely to fall within the FCA's remit, albeit that perimeter questions may ultimately be determined by the courts".
Despite a number of discussions over a period of two years (from May 2019 until March 2021) between the two regulators regarding the regulatory position, the question remained unresolved. The UKGC continued to regulate the Football Index product even though, during this time, it had formed the view that some parts of the product (for example, the ability for customers to buy and sell "shares"), did not properly fall within its regulatory remit.
In April 2020, the UKGC wrote to BetIndex and directed that it needed to take steps to ensure that the presentation of Football Index to consumers, and its terms and conditions, did not breach the Licence Conditions and Codes of Practice condition 7.1.1 (Fair and transparent terms and practices). As a result, BetIndex amended the Football Index website, to make it clear that Football Index was a gambling product.
Unsurprisingly, given the suspension of competitive football, the onset of the COVID-19 pandemic at around the same time saw widespread "selling", and the on-boarding of new customers decreased to 10% of pre-pandemic levels. As a result, BetIndex reduced its workforce by 40% and slashed its marketing budgets. Even after competitive football matches re-commenced in around July 2020, activity on Football Index remained well below pre-pandemic levels, and ultimately despite various efforts to reverse this slide BetIndex experienced severe financial difficulties such that it suspended activities and then entered administration on 11 March 2021. At 10pm on the same day, the UKGC suspended BetIndex's operating licence with immediate effect. At the time of the suspension, the "shares" cumulatively held by traders on the platform were valued at around £18.5 million on the basis of how much players were apparently willing to pay for them, though the value of open bets based on the price paid by players was around £124m.
Findings of the Review
A collapse of this magnitude prompted calls for a public inquiry which led to the Review being commissioned, to "examine the regulatory circumstances surrounding the granting of a licence to BetIndex Limited, its subsequent suspension and the company's ultimate financial failure". Malcom Sheehan QC, who was appointed as the Independent Reviewer, published his findings on 13 September 2021.2 Themes from the key findings are summarised below.
Gambling or investing?
The Review found that the "go-to-market" function of Football Index (which allowed the "traders" to sell "shares" to other "traders") had not been notified to the UKGC within BetIndex's original licence application in 2015, even though this function was apparent on the website which had been reviewed by the UKGC during the licensing process. Nevertheless, it meant that those aspects of Football Index that mimicked a stock market, and any potential for customer confusion as to whether they were "gambling" or "making investments", were not considered by the UKGC during the licensing process. Further, the Review found that it was not understood by all of BetIndex's customers that Football Index was a gambling product and not an investment, owing to "the extensive use of the language of finance and investments in connection with the Football Index product".
The Review examined and made findings regarding the involvement of both the UKGC and the FCA in the lead up to BetIndex's collapse, and the Report is critical of the time it took for both regulators to consider BetIndex's regulatory position. Although a detailed and cautious approach was required in order to understand "what was undoubtedly a novel and (at least from the legal perspective) complex product", the Report finds that this caused "a regulatory impasse…to develop and continue over far too long a period", which was "clearly insufficient". The length of time for the regulators to communicate also apparently led to confusion over their respective viewpoints and in turn a lack of coordination between them. For example, the Report references the UBD's view in February 2020 that BetIndex "may not be a case we take forward" (emphasis added), but also notes that, as a result, the UKGC did not appear to have understood that the FCA was not going to take the case forward at all. Further, when the UKGC did eventually suspend BetIndex's operating licence, this was reactive rather than proactive, and was a result of BetIndex's financial position and the fact that it had by then entered administration.
The Report also provides recommendations on areas for improvement on the part of the regulators. It indicates that the Memorandum of Understanding ("MOU")3 which the FCA and the UKGC entered into in June 2021 was an appropriate first step to address the issues which BetIndex faced, but that the MOU needed to go further and provide a real and appropriate mechanism to resolve regulatory responsibility disputes. Given the protracted length of time it took for the UKGC and the FCA to hold discussions and try to reach an agreed position, the Report highlights the importance of agreeing timetables and procedures for escalation, along with the need for clear procedures to record, in writing, the outcome of discussions concerning regulatory responsibility and remit.
There are a number of MOUs in place between the FCA and other domestic and overseas regulators and law enforcement agencies; MOUs are perceived as an important tool allowing regulators to share information and intelligence to which they may not ordinarily be privy, which is of particular importance given ever increasing financial activity and financial crime risk in cross-jurisdictional financial markets. However, the Report does highlight gaps in what this MOU covers, so it may be that the MOU is reconsidered and enhanced in due course in the light of the Report's recommendations.
The UKGC's initial assessment of BetIndex as a "small operator" in 2015 meant that, pursuant to its policies and regulatory model, the regulatory approach was "light touch" and BetIndex's business model and practices were not subject to proactive monitoring. At that time, the assessment was based – it seems, purely - on BetIndex's likely annual gross gambling yield being less than £5.5m, and the process did not take into account other factors such as the product's novelty or the potential for consumer harm. What BetIndex shows is that the annual revenue of an operator at a point in time during its infancy is not necessarily the only appropriate measure of the potential for consumer harm. Its annual gross gambling yield had grown rapidly: in 2017 the figure was just under £3m; in 2018 it was £15.5m; and at its peak in 2019 it was nearly £40m. A parallel may be observed with the FCA's traditional approach to so-called "small firms", which has also undergone public scrutiny recently, following collapses of small firms which led to consumers incurring substantial financial losses4. Those small firms had also been subject to "light touch" regulation only.
From the perspective of the (potentially) regulated, the question of regulatory responsibility and remit will continue to be important for businesses which offer novel or complex products, whether they be financial investments or activities classed as gambling. Businesses will seek to avoid, where possible, the expense and complication of dual-regulation, and so early analysis of the product offered (in particular any novel features and the potential for consumer confusion or harm) is key, allowing the business to take stock of regulatory position, to engage with the relevant regulators, and make any adjustments to its product, operations, or marketing as may be necessary.
The Football Index platform was novel in that it blurred the legal and conceptual distinction between a financial investment, which would generally fall within the FCA's remit, and a gambling product, which would generally fall within the UKGC's purview. The fact that the FCA itself held differing and inconsistent views from time to time regarding whether any or all aspects of the Football Index platform properly fell within its remit added to the overall confusion regarding the regulation of products and activities which lie close to regulatory perimeters. Consumers may wonder how they can be expected to distinguish between complex products which are investments from those which are in fact out-and-out bets, in circumstances where even regulators, legislators, and practitioners have difficulty.
Similarly, the Review's findings regarding BetIndex's compliance with its regulatory obligations to provide fair and transparent terms and conditions to its players seem to reflect recent concerns regarding so-called financial promotions, i.e. the way in which financial products are marketed and, in particular, whether they are "fair, clear, and not misleading". In 2021, HM Treasury and the FCA announced changes tightening the rules governing how financial promotions may be approved and by whom, and how financial products may be classified for these purposes5. In addition, the CEO of the FCA published an open letter to the House of Commons Work and Pensions Committee regarding online fraud and further enforcement powers the FCA considers should be included in the Online Safety Bill6. It will be interesting to see and compare how the rules on financial promotions and gambling advertising continue to be developed and enforced in parallel, in light of enhanced regulatory and legislative scrutiny and sensitivity as a result of the Review, and other recent independent reviews following collapses of firms which have resulted in consumer losses7.
3 See Mayer Brown alert for more information: MOU between Financial Conduct Authority and UK Gambling Commission: a framework for cooperation and information-sharing | Perspectives & Events | Mayer Brown