Oral Submission for Betfair Limited on National Gambling Amendment Act B31-2007
Before the Portfolio Committee on Trade & Industry on 22 August 2007
Lungile Mazwai, of attorneys Ledwaba Mazwai
Good morning Honourable Chairperson and Honourable Members of the Committee.
I am Lungile Mazwai of
attorneys Ledwaba Mazwai who have been engaged by Betfair Limited (“Betfair”) a
This speaking note is presented in conjunction with a slide presentation, both of which are supported by a written submission. All of these documents were submitted to the Committee Secretary on Monday 20 August 2007. We urge Honourable Members to consider the further detail and analysis contained in this written submission.
May I refer you to slide 2 setting out the outline of the presentation. You will note that each section of the slide presentation is referenced to the corresponding section in the written submission. Mr Kernohan will present the remainder the introduction and slides on the context. I will then present the slides on the substantive submissions, conclusion and recommendation.
If I may now hand over to you Elliott.
Elliott Kernohan, General Counsel – Corporate M&A, Betfair
Brief introduction of Betfair
Betfair is a major
internet-based sports betting and gaming company, based and licensed in the
We set ourselves apart from many other interactive gambling providers in that we actively seek to become licensed and to work proactively alongside governments whose policy is to regulate, and we have a long track record in doing so.
Betfair‘s business activities are conducted entirely through various means of electronic communication and include a full range of online gambling games and betting products, from online poker and casino, to traditional multiple fixed odds betting on sports.
Our core business, for which we are best known, is the betting exchange. A betting exchange uses advanced computer software to perform what is in essence a very simple idea, which is to ensure that every stake risked by one player is exactly matched by the stake of another player. This method is highly desirable from a regulatory standpoint because it provides better player safety (the operator is not betting against his customers) and better fiscal stability than traditional methods.
is proud that many of its longstanding systems and procedures for the exclusion
of minors and combating corruption in sport have recently been adopted as the
regulatory standard for the entire online gambling industry in the
In support of
In early 2006 Betfair
initiated, designed and helped to fund a life skills strategy for the National
Gambling Responsible Programme to address the serious problem of underage
In addition ,Betfair
Regulating gambling on the internet
Online gambling has merited specific consideration by a number of governments, because:
(a) its borderless nature makes it impossible to prohibit effectively;
(b) in the online environment the serious, but familiar, concerns regarding underage and compulsive gambling, the risks of fraud and money laundering, and operational integrity, all require internet-specific measures to be addressed effectively; and
(c) the traditional prescriptive approach of gambling legislation is inherently unable to keep pace with technological advances. (Hon. Mr Rasmeni noted his concern in the last hearing on the Bill that the Committee’s time may be constantly taken up with the need for the dti to regulate every new form of activity.)
At a basic level, the internet is nothing more than a new means of delivering gambling via the medium of electronic communication. Electronic communication does not change the nature of gambling generally, and the attendant risks do not discriminate between different forms of gambling.
The slide on screen shows
the proportionate levels of regulated interactive gambling in 2006, in the
In addition, the speed and technology of the internet has enabled online poker in particular to become predominant, and its growth currently outpaces other forms.
All of these activities should be addressed by regulation if Government wants to regulate effectively in order to protect players and control the activity.
Honourable Members will
note that the Memorandum to the Bill introduces a concept that it describes as
“interactive gambling activities taking place between two or more persons that
are facilitated by a third party”. In
industry terms this is referred to as person-to-person gambling, or “P2P”.
As shown in the middle section of the slide, P2P encompasses several
different forms of gambling which together account for at least 25% and
certainly in the
Understanding this concept of P2P is central to Betfair’s substantive submissions, because the Memorandum and the text of the Bill seek to exclude P2P from the proposed regulation.
All forms of online
gambling shown in the graph, including player-to-player, are common and already
have a proven demand in
We are mindful of the Committee’s concerns regarding the legitimisation of any form of gambling. However it is an important pillar of this Bill and all similar legislation around the world that the inability in practical terms to police any prohibition means that if player protections and controls are to work, consumer demand must be able to be satisfied by those providers that are licensed and regulated.
In order to safeguard all players within the Republic and minimise the risk of harm to individuals and the community, it is therefore essential to apply regulation uniformly and not to allow loopholes or exceptions of any kind.
What is the effect of prohibition?
Honourable Members enquired of the dti as to the experience of those countries that prohibit online gambling. This slide is provided to show the size of the illegal market globally, and it emphasises that the two countries that take a high profile prohibitive stance suffer the largest illegal markets, despite the extensive measures taken to police it.
Empirical research proves
what is perhaps self-evident: the more one restricts the range of permitted
online gambling opportunities, the greater the illegal market. To illustrate this, independent consultants
estimate a 10-fold growth in online poker in
Introduction to substantive submissions
If I may I would now hand you back to Mr Mazwai who will deal with our substantive submissions and recommendations to the Committee on this Bill, which are in two parts.
Firstly, we submit that the proposed exclusion of certain forms of interactive gambling in the Bill seriously undermines the regulatory objectives.
Second, we submit that the practical and combined effect of various shortcomings in the drafting and application of the Bill in its current draft is to prevent the policy objectives being achieved.
Lungile Mazwai, of attorneys Ledwaba Mazwai
EXCLUSION OF CERTAIN FORMS OF INTERACTIVE GAMBLING FROM THE BILL
Background to this part of our submission
When the initial National Gambling Amendment Bill of December 2006 was published for comment there was no mention or reference to any form or forms of interactive gambling which would be excluded from regulation
The current Bill was published in the Gazette on the last day in July 2007 for public comment proposing the exclusion of player-to-player interactive gambling.
When the Committee sought clarity on what was in fact being excluded at the briefing on the Bill by the DTI on 8 August 2007, the NGB on behalf of the dti explained that the intention in the Bill was to make a prohibitory statement regarding player-to-player betting exchanges, thus indicating that the exclusion is intended only to apply to player-to-player betting exchanges. The Memorandum and the Bill do not refer to betting exchanges.
Betfair now understands the NGB will conclude all discussions with Provincial Licensing Authorities ("PLAs") in respect of its findings by 31 August 2007 and may propose further amending legislation to this Committee to cater for betting exchanges within 3 months from now.
Any exclusion undermines the objectives of regulation
As noted from Mr Kernohan’s presentation, several forms of player-to-player interactive gambling are made available on the internet, and all fall within the description in the Memorandum and in the Act.
May I refer to you to graph on slide 7 wherein in will be noted that –
· If the description of P2P was to apply uniformly to such activities, the Bill would fail to protect the players or impose regulatory controls on 40% of online gambling activity, including poker, the single activity for which consumer demand is growing fastest; and
· Even if it were narrowed to address just exchanges a material break in the fence protecting South African players will have been intentionally created by Parliament,
Betfair’s submission on this aspect is that any exclusion of an interactive gambling activity (whether 14% or 40%) impairs the Government’s ability to pursue the policy objectives espoused in the Bill (see paragraph 4 of the Bill inserting section 2A of the Act), and significantly increases the risk that South African players will continue to be exposed to the undesirable factors listed in paragraph 1.1 of the Memorandum.
No policy basis for the exclusion of certain forms of interactive gambling
The rationale for excluding player-to-player gambling that is given in the Memorandum is that the implications of this form of interactive gambling are currently being investigated. The essence of this rationale is, with respect, that ‘we ran out time’ in the investigation into the consequences of permitting player-to-player interactive gambling – which investigation, it bears mention, began in 2004: before the principal Act itself came into effect.
If the decision is to exclude from regulation certain forms of interactive gambling, being player-to-player interactive gambling, then the legislature is enjoined in law (including section 9(3) of the Constitution and sections 4(3) and 5 of the Promotion of Administrative Justice Act, 2000) to have a cogent rationale clearly articulating the purpose and extent of the exclusion, and to take into account representations made in respect thereof, such as this submission by Betfair before determining whether or not to make an exclusion.
No policy reasons have been articulated to date to this Committee as to why any or all forms of P2P might merit consideration separately from other forms of interactive gambling, let alone exclusion, or as to why betting exchanges specifically merit a prohibition
Betfair’s submission on this aspect is that if there is to be an exclusion of one or more interactive gambling activities, then the purpose of the exclusion must be clearly established and extent of the exclusion must be clearly defined. The Bill in its current form does not with respect achieve any such clarity.
Betfair operates the largest betting exchange, and is the
only offshore exchange seeking to be regulated in
Betfair’s submissions on the developments between the Gazetting of the initial Bill in December 2006 and the current Bill are –
· Betfair has not been afforded adequate opportunity to comment on the Bill nor to consult with the dti on the Bill;
· Betfair was denied the opportunity to review and comment on the Bill with the benefit of all information which it sought to obtain. In particular Betfair unsuccessfully engaged the NGB from Monday 14 August 2007 to urgently obtain a copy of the NGB Sub-committee’s Report on Betting Exchanges of 2006 and other documentation related thereto. Copies of this correspondence are enclosed with the written submission;
· procedurally there has been inadequate public consultation on the Billas noted by the Committee on 8 August 2007 and acknowledged by the dti. This inadequate pubic consultation process is exacerbated by the fact that as at 20 August 2007 the dti website home page had a link to the Bill of December 2006, and not the Bill currently before the Committee.
To jurisprudential importance of adequate public consultation, may I mention that the Supreme Court of Appeal recently reiterated this in the matter of Chairperson's Association vs Minister of Arts and Culture, 2007 (SCA) 44 (RSA, wherein the decision of the Minister of Arts and Culture in terms of section 10(1) of the South African Geographic Names Council, Act 118 of 1998 and published in the Government Gazette Notice 864 of 20 June 2003 to approve the change of the geographical name of Louis Trichardt to Makhodo was reviewed and set aside because there was inadequate consultation with local communities and other stakeholders.
The explanation of the proposed exclusion and the targeted activity interpretation by the NGB is not backed up by the text of the Bill in that the Bill makes no reference to betting exchanges and when one has reference to the definition of ‘interactive provider’ in the Bill which prohibits a person, other than a bookmaker, from providing P2P gambling activities. If there is indeed a cogent policy basis for the exclusion of P2P, such policy is directly undermined in the Bill, because the exclusion does not apply to bookmakers. Further whether or not any such policy basis is so undermined, a discriminatory advantage is created in favour of bookmakers as against all other licensed providers.
The exclusion as it is presently expressed in both the Bill
and the Memorandum would effectively extend to the online businesses of the
Republic’s two licensed totalisators.
Phumelela Gaming and Leisure Limited, in particular, is currently the
largest licensed operator of P2P gambling activity in
If exclusion is justified on policy grounds, it can be circumvented
If there is indeed a policy reason meriting a separate treatment of P2P from other forms of interactive gambling, it bears mention that such a policy consideration could be easily circumvented by an operator characterising a single player-to-player transaction as two distinct and separate transactions with the operator, where the first transaction is between player 1 and the operator and the second transaction is between player 2 and the operator.
Regulation of future forms of interactive gambling activities
If the legislature is inclined to pass the Bill in its current form, Betfair draws the Committee’s attention to the following issues –
· there is no mechanism in the Bill through which the excluded player-to-player interactive gambling will be resolved or determined once the investigation being undertaken is completed; and therefore
· a mechanism needs to be provided for in the Bill to deal with the outcome of the investigation of player-to-player interactive gambling, and any future forms of gambling of activities driven by technology without in every instance having to amend legislation.
I will now take the Committee Members to the next slide dealing with the second substantive part of Betfair’s submission.
PRACTICAL IMPACT OF CERTAIN PROVISIONS AND OMISSIONS IN THE BILL
This second substantive part of Betfair’s submission highlights certain other aspects of the Bill that in Betfair’s view give rise to the serious practical risks that the dti’s policy objectives can never be achieved under the Bill as now drafted. What these aspects highlight is, with respect, an apparent disconnection on the part of the dti as between the objectives of regulatory policy, and the effect of the Bill itself on the actual activity sought to be regulated.
Player protections not uniformly applied to all providers
The player protections and operator safeguards set out in the Bill, which collectively form the framework by which the Bill seeks to protect the public and control interactive gambling, are not sought to be imposed upon all licensed providers of gambling on the internet
We understand this is a deliberate, but unarticulated, variation from the policy expressed in the Memorandum, based on the concurrent competency of Provinces to license these forms of activity. However the risks to players which this Committee is being asked to protect against apply to all forms of gambling on the internet, and these risks do not abate at Provincial boundaries. Currently no provincial gambling laws provide any player protections of the kind recommended under this Bill.
We do not suggest that provincial competency be restricted in the online context: to the contrary we respectfully submit that the framework articulated in the Bill must be applied uniformly by the PLAs to all providers whom they license, exactly as they are proposed to apply to national licence holders.
Without such uniformity, not only does the Bill extend a competitive advantage to certain classes of operator, but more importantly it creates a two-tier framework of player protections and industry controls which exposes the dti’s policy to the risk of eventual failure.
May I refer you to next slide showing which interactive gambling activities would be excluded from regulation.
Bill is not technology-neutral: favours activities of existing operators
The current draft of the Bill has omitted the main provision contained in the December 2006 draft that would have ensured that the framework of player protections is technology-neutral
Paragraph 7 of the previous draft Bill inserted a new subsection 5(1A) into the principal Act which cast the net of regulation across all forms of gambling which take place using means of electronic communication. Its sudden (and unexplained) omission now means that the Bill relies for its scope exclusively on the particular forms of gambling that are already authorised to be provided by the incumbent licensees in the land-based environment under the Act. The effect of this omission, whether intended by the dti or not, is to restrict the range of licenseable online activity to only those activities that were already understood in the land-based environment in 2004. This in turn carries a significant risk under the Bill that the existing operators will entrench their competitive position, without the opportunity for regulation of the wider range of activity which many South Africans already participate in.
Such a handicap, to the extent the existing licensees may
retain their present exclusivity, will accordingly also limit the level of new
BBBEE investment, inward technology investment and skills transfer into
Onshore server requirement handicaps policy objectives
Section 37(4) of the Bill imposes the obligation on the
licensed provider to locate all its interactive gambling equipment in the
Republic. Unlike the
Such a stringent onshoring requirement fails to take account of the fact that most of the operators at which this regulatory policy is targeted have already made very significant investments in acquiring licences in other jurisdictions. As the Bill is currently drafted, those existing offshore operators will have to forego both their investments and their other licences in order to submit to South African regulation.
If every other jurisdiction in the world adopted the same
approach on this aspect, a regulatory regime would emerge which would seek to
place geographical boundaries to an environment which does not enjoy such
borders. In any event it would become
impossible for world class operators to have their equipment in every jurisdiction
The legislator’s (and the regulator’s) concern to exercise a level of control over the operator and its equipment can be achieved, as is the situation in other jurisdictions, without requiring the equipment to be in the Republic.
Player age verification measures lack rigour
The most important player protection that any government seeks to impose on its gambling industry is the requirement to exclude minors from accessing gambling facilities.
By contrast, although in many other respects the player protections articulated in the Bill set very high compliance thresholds, section 11A(1)(b)(iii) of the Bill merely requires an interactive provider in South Africa to obtain a statement from the player that he or she is 18 years or older. It is very likely that most operators will in practice automate the giving of this statement as part of the player’s acceptance of terms and conditions, and will not bring it to the attention of the player, let alone take positive steps to perform AV.
Nominated account requirements undermine player retention and industry sustainability
In Betfair’s respectful view the nominated account
provisions are more correctly the subject of secondary regulation and licence
conditions (as in the
Drafting of the Bill creates uncertainty
To the extent that different forms of interactive gambling activity are regulated differently, the lack of uniformity will create uncertainty that will influence the actions of all stakeholders, not least in the minds of the public who will be the last to appreciate the subtleties of what is regulated and what is not.
As will have been noted from the preceding submissions, there are a number of instances where the Bill creates uncertainty.
I now move to the conclusion of this presentation.
The policy framework informing the Bill is both sound and achievable. Whilst the initial Bill of December 2006 has its own shortcomings, its articulation of the policy objectives was preferable to the current Bill.
The shortcomings and inadequacies of the Bill demonstrate a less than comprehensive understanding of both policy and operational issues, perhaps occasioned by the incomplete investigation on all matters pertaining to the regulation of interactive gambling.
The cumulative effect of the proposed exclusion of P2P (discussed in section 7 above) and shortcomings of certain provisions of the Bill on operational matters (discussed in section 8 above) is that the Bill fails to convert its policy objectives into legislative provisions to enable the achievement of those objectives.
The high level solutions which Betfair would propose be considered to address its substantive submissions in section 7 and 8 above are the following –
· avoid any form of exclusion or prohibition, whether broad or narrow, which would in turn obviate loopholes and confusion;
· apply the player protections and regulatory requirements uniformly to all forms of interactive gambling, including bookmakers, totalisators, exchanges, poker, and so forth;
· remove obstacles to customer retention so as to protect those who participate; and
· apply measures to enable offshore providers to submit to South African jurisdiction
In the circumstance Betfair proposes that the Bill be rejected in its current form to enable the current shortcomings and inadequacies to be resolved and to implement the solutions proposed.
We thank the Honourable Members for their consideration of our submission, and shall be pleased to respond to any questions or clarify any aspect of the presentation which Honourable members would like us to.