WRITTEN SUBMISSION BY BETFAIR LIMITED

(BETFAIR)

 

AT THE PUBLIC HEARINGS OF THE PORTFOLIO COMMITTEE ON

ON TRADE & INDUSTRY IN RESPECT OF

THE NATIONAL GAMBLING AMENDMENT BILL, 2007 [B 31-2007]

HELD ON 22 AUGUST 2007

 

 


 

 

1.                   INTRODUCTION

1.1.       Betfair is pleased to make this written submission in respect of the National Gambling Amendment Bill 2007 (the “Bill”) which is intended to amend the National Gambling Act, 2004 (the "Act"). 

1.2.       The submission will be presented in person by Elliott Kernohan who is General Counsel at Betfair, and Lungile Mazwai of attorneys Ledwaba Mazwai.  Adheera Bodasing, a consultant to Betfair whose name is listed in the agenda for the public hearings, is unfortunately unable to attend the public hearing.

1.3.       This written submission is supported by a slide presentation together with speaking notes for those presenting in person to the Committee.  All of these documents were submitted to the Committee Secretary on Monday 20 August 2007.  We will take the Committee through the slide presentation in the hearing, but urge Honourable Members to consider the further detail and analysis contained in this written submission.

1.4.       Our presentation begins with an introductory section: summarising Betfair’s submissions and briefly introducing Betfair to the Committee, in particular its credentials in relation to South Africa, and in relation to global regulatory matters.  We include a short section explaining the forms of regulated interactive gambling that are prevalent globally, and present some information on the effect of prohibition in those countries that attempt it.  Following this overview we present Betfair’s substantive submissions on the Bill, in two parts.  Finally we welcome any questions that the Committee may have in relation to our presentation.

2.                   SUMMARY OF BETFAIR’S SUBMISSION ON THE BILL

2.1.       Betfair supports the overriding regulatory objective of this Bill, which is, as articulated by Fungai Sibanda, the Acting Deputy Director-General of the Department of Trade and Industry (the "dti") before this Committee on 8 August 2007, to regulate interactive gambling in the public interest in order to protect and control.

2.2.       Betfair also supports the various policy objectives of the Bill as set out in paragraph 1.6 of the Memorandum on the Objectives of the to the Bill (the "Memorandum"), which include: effective and uniform regulation of interactive gambling, the protection of persons who participate in licensed gambling activities, and the protection of vulnerable persons.

2.3.       Notwithstanding our support of all of these objectives, this submission is directed towards persuading this Committee to reject the Bill in its present form because:

2.3.1.        the proposed exclusion of certain forms of interactive gambling in the Bill seriously undermines the regulatory and policy objectives; and

2.3.2.        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.

2.4.       Our recommendation to the Honourable Members is that the Bill be sent back to the dti for further work to address these shortcomings.

3.                   BRIEF INTRODUCTION OF BETFAIR AND ITS BUSINESS

3.1.       Betfair is a major internet-based sports betting and gaming company, based and licensed in the UK, with substantial licensed operations also in Australia and Malta, and other licenses held in Italy, Germany and Austria.

3.2.       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 highly advanced method or system for accepting fixed odds bets that we developed ourselves.  The combination of these activities from multiple licensing jurisdictions makes Betfair one of the largest interactive gambling operators in the world.

3.3.       By way of brief description, a betting exchange is a technologically advanced method or system which is controlled by the licensed provider for entering into fixed odds bets on sports and other events by which every stake risked by one player is matched exactly by that of another player.  All players are known to the operator, and their contact with each other is only through the medium of the betting exchange.

3.4.       What makes Betfair’s betting exchange unique is its use of highly advanced technology (software) to eliminate the operator’s risk on the outcome of any betting event.  This makes the exchange method (which is a form of person-to-person gambling, discussed below) a highly desirable one from the standpoint of player safety and fiscal stability.  Betfair’s understanding and application of technology has also enabled it to set the global benchmark in player protection and anti-money laundering measures, and is recognised as one of the leading IT employers anywhere in the world.

3.5.       Betfair 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 UK.  Betfair’s innovation was honoured by the UK Department of Trade and Industry in 2003 with the Queen’s Award for Enterprise.

4.             BETFAIR’S ASPIRATIONS IN SOUTH AFRICA

4.1.       In support of Government’s long-standing policy of regulation in preference to prohibition, Betfair has proactively sought to become a licensed gambling operator in South Africa since February 2004.  Its first official contact with the National Gambling Board (the "NGB") took place in April that year when it was invited to present its business case.  Since then it has continuously sought with the benefit of its experience in working with governments in other jurisdictions to promote and inform the South African government’s policy objectives for safe and effective regulation of online gambling.

4.2.       At the time of submitting this document Betfair was the only offshore operator scheduled to appear before the Committee, and as far as it is aware is the only major interactive gambling operator to have approached the dti and the NGB to be regulated.

4.3.       Betfair fully supports Government’s objectives on socio-economic development and legislation on Broad-based Black Economic Empowerment, and after meeting a number of parties is already in advanced discussions with a prospective black economic empowerment partner.  Furthermore Betfair’s requirement for skilled computer science graduates, call centre operators and business process outsourcing (BPO) capacity puts it firmly within the industries targeted by ASGISA.

4.4.       Betfair has identified several rural and urban projects to promote socio-economic development within the sporting fraternity in South Africa.

4.5.       In 2005 and 2006 Betfair initiated, designed and helped to fund a life skills strategy for the National Gambling Responsible Programme (NRGP) to address the serious problem of underage gambling in South Africa.  The NRGP has now further developed this initiative, which it intends ultimately to promote to the Department of Education as part of the national curriculum from Year 7.

5.             REGULATING GAMBLING ON THE INTERNET

5.1.       What should be regulated and why?

5.1.1.        The notional focus of this legislation is on all of the various forms of gambling which take place via the internet, and the desirability or otherwise of regulating in the public interest.

5.1.2.        The principal reasons why online gambling has merited specific consideration by a number of governments are:

5.1.2.1.        its borderless nature makes it impossible to prohibit effectively;

5.1.2.2.        the physical absence of players from the gambling premises, and therefore the potential for player and operator anonymity, requires internet-specific measures to address the serious, but familiar, concerns regarding underage and compulsive gambling, the risks of fraud and money laundering, and operational integrity;

5.1.2.3.        the traditionally prescriptive approach of governments to gambling regulation means that legislation is inherently unable to keep pace with technological advances.

5.1.3.        These reasons explain why many regulating governments emphasise the need for regulation to be technology-neutral, and why it is proposed in the present Bill (at paragraph 7 of the Bill amending section 5 of the Act) that the Minister should have authority to prescribe regulations applicable to specific interactive games, systems and methods.  The alternative, which Mr Rasmeni noted in the last hearing on the Bill, is for the dti to be constantly before this Committee with every new form of activity.

5.2.       What has been regulated elsewhere?

5.2.1.        Other than the very broad statement in the Memorandum, that “interactive gambling is generally considered to mean all forms of remote gambling conducted via the internet or related forms of telecommunication”, nowhere in any document or policy statement presented to this Committee to date has any attempt been made to describe the main forms of licensed commercialised gambling that exist on the internet.  The following paragraphs attempt to do so.

5.2.2.        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.  Accordingly, all the same forms of gambling available in a land-based environment can be made available via the internet.

5.2.3.        This point is illustrated by the following graph which shows a breakdown of the different online gambling undertaken in the UK and globally during 2006, broken down by total player spending (ie. operator revenue).  The source of this data is one of the leading independent industry consultants, Global Betting and Gaming Consultants (GBGC).

 

5.2.4.        The forms of gambling with which the Committee may be familiar in a land-based environment (fixed odds and tote betting, and casino) have a strong internet presence.  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.

5.2.5.        An increasingly prevalent feature of the global online industry is the provision by a single operator of several forms of gambling activity in order to appeal to customers over a longer period.  Accordingly to regulate less than all of the common forms, or regulate them differently, invites confusion in the minds of players, and creates an incentive for operators to circumvent regulation (or an incentive not to submit to licensing at all).

5.2.6.        The Memorandum introduces a concept that it describes as “interactive gambling activities taking place between two or more persons that are facilitated by a third party” (see paragraph 1.2 of the Memorandum).  In industry terms this is referred to as person-to-person gambling, or “P2P”.  As shown in the graphs above, P2P encompasses several different forms of gambling which together account for at least 25% and possibly 40% of global interactive gambling.  The Memorandum and the text of the Bill seek to exclude P2P from the proposed regulation.

5.2.7.        Honourable Members should note that no form of person-to-person betting can take place without the approved technology for that activity being provided and controlled by the licensed provider.  Understanding this concept of P2P is central to Betfair’s substantive submissions, below.

5.2.8.        It is also worth noting that in no jurisdiction of which Betfair is aware has any government sought to exclude types of gambling (player-to-player or otherwise) simply because they occur principally on the internet: the focus is to regulate the internet as a delivery channel which presents its unique risks uniformly across all modes of gambling.

5.2.9.        Online poker, like betting exchanges, is a gambling activity provided by a licensed operator which enables players to gamble safely amongst one another in a regulated environment.  It works identically to a poker tournament in a land-based casino, but such tournaments rely on having a critical mass of players with similar risk appetites simultaneously present at the casino.

5.2.10.    Conversely, the internet enables large numbers of players to congregate virtually at a website, and the larger the number of registered players, the greater the likelihood that enough players will be found at the same recreational spending level to enable a game to begin. Player-to-player poker’s very appeal is the ability for players to compete against each other rather than against the house (where the odds are fixed in favour of the house).  The online form, because it is interactive between autonomous players, is also far more a game of skill than the casino variant.

5.2.11.    The betting exchange is also in the ascendancy for the same reasons of community, skill and competition: the licensed operator provides a safe platform for fixed odds betting, rather than a card game.

5.2.12.    We would also draw your attention to the middle sections of the graph, which are grouped together specifically to highlight that totalisator betting, which is and has been for some time the main form of betting on horseracing and sport in South Africa, is another form of player-to-player gambling which is made currently available on the internet.[1]

5.2.13.    All of the forms of online gambling shown in the graph are common and already have a proven consumer demand in South Africa.  Some are already licensed to be made available in South Africa, others are proposed to be regulated by this Bill.  Some are proposed to be excluded from regulation. 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 effectively means that consumer demand for any form of gambling on the internet must be able to be satisfied by licensed providers if player protections and controls are to work.

5.2.14.    In order to safeguard all players within the Republic and ensure that 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.

5.3.       What is the effect of prohibition?

5.3.1.        To address the Committee’s recent enquiry on the experience of those countries that prohibit online gambling, the graph below is provided to show the size of the illegal market globally, and emphasises that the two countries that take a high profile prohibitive stance suffer the largest illegal markets.  Note that the table combines online and land-based illegal activity, highlighting that prohibition makes it difficult or impossible to adequately identify what is online and what is not.

5.3.2.        Although not illustrated in the table above GBGC predicts that in the wake of the US prohibitive legislation specifically aimed at online gambling in October last year, the global illegal market may have grown now to ZAR2, 175bn, although accurate figures are not yet available.

5.3.3.        In concluding this section on prohibition we would make two observations:

5.3.3.1.        GBGC estimates a 10-fold growth in online poker in Africa from 2006 to 2012, whether or not the Bill is passed.

5.3.3.2.        GBGC’s empirical research proves what is perhaps self-evident: the smaller the range of permitted online gambling opportunities, the greater the size of the illegal market.

6.             INTRODUCTION TO SUBSTANTIVE SUBMISSIONS

6.1.       Betfair’s substantive submissions on the Bill are based on our experience of working in many jurisdictions, and comprise an analysis of various aspects of the Bill in its current form which together result in the Bill as a whole failing to meet the stated regulatory and policy objectives:

6.1.1.        Section 7 of this submission argues that the proposed exclusion of certain forms of interactive gambling in the Bill seriously undermines the regulatory objectives.

6.1.2.        Section 8 of this submission argues 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.

6.2.       The policy background informing our analysis includes the NGB’s Report on the Regulation of Interactive Gambling dated 10 October 2005, which in turn informed the National Policy Framework document which the dti presented to Cabinet along with the previous draft of this Bill in December 2006.

6.3.       For the purpose of the present submission we take the overriding regulatory objective to be that set out in paragraph 2.1 above as articulated by the Committee, and the relevant policy objectives to be those set out in paragraph 1.6 of the Memorandum, which are –

6.3.1.        effective and uniform regulation, licensing and controlling of interactive gambling;

6.3.2.        protection of persons who participate in licensed gambling activities;

6.3.3.        protection of children and other vulnerable persons from gambling;

6.3.4.        protection of society and the economy against over-stimulation of demand for gambling;

6.3.5.        licensing of interactive gambling providers and registration of players;

6.3.6.        conducting of interactive gambling activities in a transparent, fair and equitable manner; and

6.3.7.        monitoring and control of interactive gambling.

7.             EXCLUSION OF CERTAIN FORMS OF INTERACTIVE GAMBLING FROM THE BILL

7.1.       Background to this part of our submission

7.1.1.        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.

7.1.2.        The current Bill was published in the Gazette on the last day in July 2007 for public comment proposing the exclusion of interactive gambling taking place between two or more persons that are facilitated by a third party (which we have referred to in this submission as "player-to-player" or "P2P") (see paragraph 1.2 of the Memorandum and the definition in ‘interactive provider’ in the Bill).

7.1.3.        The precise nature and extent of the proposed exclusion of player-to-player gambling activities is not explained or defined.  When the Committee sought clarity on this aspect at its hearing 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.

7.1.4.        There is no reference in either the Memorandum or the text of the Bill to betting exchanges.

7.1.5.        The Memorandum does, however, refer to an ongoing investigation into P2P (which the NGB also told this Committee was now completed).  Having spoken to the NGB since the statements to this Committee on 8 August 2007, Betfair now understands the NGB will conclude all discussions with Provincial Licensing Authorities ("PLAs") in respect of its completed findings on betting exchanges by 31 August 2007, and may propose further amending legislation to this Committee to cater for betting exchanges within 3 months from now.

7.1.6.        The proposed exclusion of P2P, whether in the wide or narrow sense is unsatisfactory and confusing given the following observations –

7.1.6.1.        the dti at its presentation of the Bill to the Committee on 8 August 2007 did not bring to the attention of the Committee the proposed exclusion of player-to-player gambling activities from regulation.  The proposed exclusion was only addressed following a question from the Committee;

7.1.6.2.        the Bill seeks to exclude from regulation an activity which is already unlawful in terms s.8 of the Act.  The Committee is also referred to the enclosed notice number 002/2007 issued by the NGB on 16 April 2007 wherein the NGB confirms that interactive gambling is prohibited;

7.1.6.3.        to the extent that a betting exchange (or any other form of P2P) is a game, method or system for conducting an interactive gambling activity, the Bill already proposes mechanisms to establish regulations in respect of the same;

7.1.6.4.        the draft of the Bill made available for public consultation in December 2006 did not contemplate the exclusion of any forms of interactive gambling and no reference was made to any investigation into the implications of player-to-player gambling activities; and

7.1.6.5.        at the date of this submission, only the December 2006 draft of the Bill was available at the dti’s website, inviting public confusion as to exactly what is intended.

7.1.7.              Regardless of the language used, the likely effect of a legislative exclusion as proposed in the Bill is to prohibit, and Betfair’s submission in respect of the proposed exclusion has been structured accordingly.

7.2.       Any exclusion undermines the objectives of regulation

7.2.1.        Paragraph 1.2 of the Memorandum states that the Bill excludes interactive gambling taking place between two or more persons that are facilitated by a third party.

7.2.2.        As noted in section 5 above, 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.

7.2.3.        If this 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.  Even if it were narrowed to address just exchanges (and aside from issues of discrimination argued below) a material break in the fence protecting South African players will have been intentionally created by Parliament.  Such a result runs directly against the general and stated approach by Government and the regulator to regulate rather than prohibit.

7.2.4.        To Betfair’s knowledge no other national jurisdiction in the world excludes any form of P2P from its internet regulation.  That of itself is no reason for South Africa to follow international precedent, but, with respect, it would appear to contradict many of the policy objectives and specific provisions in the Bill (for example concerning international norms referred to in paragraph 2 of the Bill inserting section1A of the Act).

7.2.5.        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.

7.3.       No policy basis for the exclusion of certain forms of interactive gambling

7.3.1.        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.

7.3.2.        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.

7.3.3.        As noted above neither the Memorandum nor the Bill make reference to betting exchanges, or to a prohibition or grounds for one.  However when questioned by this Committee, the NGB on behalf of the dti stated that the intention is to make a prohibitory statement in respect of player-to-player betting exchanges specifically.

7.3.4.        No policy reasons have been articulated to date to this Committee as to why:-

7.3.4.1.        any or all forms of P2P might merit consideration separately from     other forms of interactive gambling,

7.3.4.2.        any or all forms of P2P merit exclusion from the Bill; or

7.3.4.3.        betting exchanges specifically merit a prohibition.

7.3.5.        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.

7.3.6.        Furthermore, as noted above, we are aware that the NGB completed a study into the regulation of betting exchanges late last year or earlier this year, which study concludes (we understand) that all stakeholder concerns are capable of being addressed through regulation.  The study referred to was undertaken by a sub-committee formed especially to investigate betting exchanges and how they are regulated in other jurisdictions. An earlier 2004 report and attendant draft legislation were withdrawn by the NGB in 2005.  This new sub-committee undertook detailed investigation including comprehensive interviews with regulators and operators in the UK in late 2006.

7.3.7.        On 14 June this year the NGB stated to Betfair that its preference would have been to regulate betting exchanges in the Bill.  Betfair now understands the NGB may propose further amending legislation to this Committee to cater for betting exchanges within 3 months from now. 

7.3.8.        Our submission in light of the above is that there clearly is no cogent policy basis offered to justify the exclusion or prohibition of any form of player-to-player gambling, or specifically of betting exchanges.  Without such a basis, to actively exclude or prohibit is inconsistent with the specific policy objectives in the Bill, directly counter to long-standing government policy, and is constitutionally unfounded.

7.4.       Exclusion of certain forms of interactive gambling is discriminatory

7.4.1.        On 8 August 2007 the Committee was told by NGB that its intention was to make a prohibitory statement in the Bill regarding specifically P2P betting exchanges. 

7.4.2.        Betfair operates the largest betting exchange, and is the only offshore exchange seeking to be regulated in South Africa: if indeed the NGB wishes to target betting exchanges rather than all P2P, the effect of such a prohibition will be to prevent Betfair, and Betfair alone, from submitting to South African jurisdiction. 

7.4.3.        Betfair’s submissions on the developments between the Gazetting of the initial Bill in December 2006 and the current Bill are –

7.4.3.1.        Betfair has not been afforded adequate opportunity to comment on the Bill nor to consult with the dti on the Bill;

7.4.3.2.        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. A copy of a letter sent to the NGB by Betfair’s advisers, and NGB’s response thereto, are enclosed; and

7.4.3.3.        procedurally there has been inadequate public consultation on the Bill[2] as 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.

7.4.4.        The Constitution of the Republic of South Africa Act, 1996 which applies to the legislature provides at section 9(3) (read with the Promotion of Equality and Prevention of Unfair Discrimination Act, 2000) that the state may not unfairly discriminate, directly or indirectly, against anyone on any one or more grounds.  The manner in which the Bill seeks to prohibit certain forms of interactive gambling activities (whether all P2P or only betting exchanges) constitutes an unfair discrimination by the state in the absence of a Constitutional basis for such discrimination.

7.4.5.        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:

7.4.5.1.        the Bill makes no reference to betting exchanges;

7.4.5.2.        the definition of ‘interactive provider’ in the Bill 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;

7.4.5.3.        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; and

7.4.5.4.        the discrimination, which is not accompanied by any lawful basis or policy consideration, not only permits bookmakers to provide P2P interactive gambling, but to do so without reference to or compliance with the player registration and other protections in the Bill, which providers of permissible interactive gambling activities would be required to comply with.

7.4.6.        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 South Africa.  At the time of submitting this document, Phumelela did not appear on the agenda to appear before the Committee today – perhaps occasioned by the inadequate consultation process undertaken to date on this Bill.

7.5.       If exclusion is justified on policy grounds, it can be circumvented

7.5.1.        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.

7.5.2.        This highlights the often-repeated point that regulation needs to be genuinely technology-neutral if it is to be effective.  No form of interactive gambling occurs in a vacuum: the licensed operator controls the approved gambling system and regulates player activity like any land-based operator.

7.6.       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

7.6.1.        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

7.6.2.        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.

8.             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.

8.1.       Player protections not uniformly applied to all providers

8.1.1.        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.  Paragraph 6 in the Bill which amends section 4 of the Act expressly permits existing bookmakers and totalisators to provide their licensed gambling activities by means of electronic communication (as they currently already do) but it does not constitute them “interactive providers” subject to the protective framework afforded by the Bill.

8.1.2.        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. 

8.1.3.        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.

8.1.4.        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.

8.2.       Bill is not technology-neutral: favours activities of existing operators

8.2.1.        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.

8.2.2.        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. 

8.2.3.        Specifically, it is the interaction between sections 4 and 5 of the principal Act which construct the distinction between casino activity and betting and wagering in the land-based environment. They were not considered adequate for the purposes of online regulation in 2004, yet after 2 years of policy research they remain the basis by which an interactive game is defined.  Accordingly if a new operator seeks to submit to South African regulation an activity that was not contemplated in 2004, it cannot be licensed under the Bill without further detailed legislative amendment. [3]

8.2.4.        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.

8.2.5.        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 South Africa.

8.3.       Onshore server requirement handicaps policy objectives

8.3.1.        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 UK, which is the most recent leading jurisdiction to have regulated, there is no discretion afforded to the licensing authority in the Bill to waive or partially waive this requirement should the operator by some other means satisfy the requisite equipment monitoring and security requirements.

8.3.2.        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.

8.3.3.        The same observation applies to the suppliers of the necessary technology and support systems to the interactive gambling industry, who may now need to consider whether the opportunity to supply South African providers merits relocating their business activities into the Republic.

8.3.4.        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 – if South Africa had been the first jurisdiction to make this requirement, then the other jurisdictions would be in the position South Africa is now.

8.3.5.        This requirement also arguably creates an artificial competitive advantage for the incumbent licensees whose existing technology is already in the Republic, which offshore operators will find difficult to overcome.

8.3.6.        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.  Such a requirement, while perhaps desirable on its face and in the first instance, is able to be dispensed with in practice (and therefore ought to be) if the regulator is satisfied on a case by case basis that it may exercise its oversight through other means. 

8.4.       Player age verification measures lack rigour

8.4.1.        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. 

8.4.2.        In the UK this requirement is articulated by obliging online licensees to take active steps within a limited time period following player registration to age verify every player (known as “AV”).  Information enabling the operator to do this varies significantly depending on their location.  Therefore in order to create a player incentive to age-verify, no player is permitted to withdraw any winnings from a UK player account unless he or she is age verified by the operator.

8.4.3.        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.

8.4.4.        This issue is exacerbated by the positive obligation imposed on providers under the Bill to push all winnings beyond a stated amount directly to the player’s bank account (discussed below).

8.5.       Nominated account requirements undermine player retention and industry sustainability

8.5.1.        In Betfair’s respectful view the nominated account provisions are more correctly the subject of secondary regulation and licence conditions (as in the UK) rather than primary legislation, because technology, payment methods and industry practice change rapidly in this area.

8.5.2.        That view notwithstanding, in several respects the specific requirements set out in the Bill are unclear, and on their face may impose unnecessarily onerous barriers to player registration and retention within the protective regulatory net:

8.5.2.1.        The definition of ‘nominated account’ implies (but does not make clear) that the player may only be entitled to nominate and therefore only use one account, rather than several.  No reference is made to the use of credit cards, although the dti submitted to this Committee that it would be the principal form of payment.  The habit of players is to use more than one account and to register more than one credit card with any given provider.  Provided each player is verified to be the owner of each separate payment method and (at appropriate spending levels consistent with FICA) each source of funds, to restrict players to one account serves no practical or regulatory purpose.

8.5.2.2.        Section 11A(1)(a)(iii) is unclear as to whether the player spending limit may be changed as his circumstances change, or whether it renews periodically to enable the player to continue funding his player account.  In practice, any spending limit is unlikely to be attractive to the majority of players.  Rather, what players expect and benefit most from is the ability to set voluntary spending limits or self-exclusion limits, subject to cooling off periods in the event they may wish to change them.

8.5.2.3.        Betfair does not provide credit to individual players, and accordingly as an operator is neutral on the subject.  However, in our view the restriction on providing credit to players is unnecessary, so long as the provision of credit and those providing it are subjected to existing consumer credit legislation.  To a significant degree if a player is likely to become over-extended on credit, it is preferable from a responsible gambling point of view if the operator itself has oversight and financial exposure to that credit risk.  The prohibition on operators providing credit is in any event at odds with the predominant method of payment for interactive gambling services, which is the credit card.

8.5.3.        Section 11A(1)(c) requires the provider to immediately transfer back to the player’s bank account (ie. outside the gaming environment) funds in excess of the player’s spending limit.  While perhaps desirable from a player protection point of view, this ignores the recycling principle which is at the heart of the sustainable provision of regulated gambling – it drives the fundamental Return To Player calculation.  If players may not recycle their winnings the operator will not have enough money to pay other winners.  Losing players will lose more quickly.  Winning players will abandon licensed operators for offshore providers who do permit recycling.  If recycling is impaired, the fundamental objective of this regulation is at risk.

8.5.4.        In isolation these provisions rightly reflect genuine concerns with regard to protecting players and the vulnerable.  However they address those concerns in a manner and to an extent not necessary to achieve the policy objective.  Industry experience informs us that players will readily prefer to seek other operators and gamble outside the regulated environment if their experience of participating is needlessly procedure-bound.

8.5.5.        Accordingly if the Bill is to capture the activity of existing and future online players within the protective regulatory net, further work by the dti is adviseable to ensure the player protections required by the Bill will actually be acceptable to consumers in the marketplace.

8.6.       Drafting of the Bill creates uncertainty

8.6.1.        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 different regulatory standards.

8.6.2.        We have already referred in section 7 above to the different treatment of player-to-player gambling, and in section 8.1 above to the different treatment of operators already licensed in the online environment. 

8.6.3.        The effect of the wording used to define “interactive provider” creates uncertainty as to what activity is included in the regulation and what is not.  On the basis of the plain language used, it would appear that a bookmaker (but no other person, not even a licensed interactive provider) may provide P2P, and may do so freely outside the scope of the player protections and other mechanisms imposed on those regulated as interactive providers.  ;

8.6.4.        Paragraph 3 of the Bill amending Section 2 of the Act (Application of Act) makes no mention of the intention to exclude certain forms of interactive gambling.  Rather, it seems from the language used that the Bill is intended only to apply to licensed forms of gambling, and not unlicensed forms;

8.6.5.        Paragraph 4 of the Bill inserting Section 2A(a) of the Act (Purpose of Act) makes no mention of the intention to exclude certain forms of interactive gambling.

9.             CONCLUSION

9.1.       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.

9.2.       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.

9.3.       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.

9.4.       The high level solutions which Betfair would propose be considered to address its substantive submissions in section 7 and 8 above are the following:

9.4.1.        avoid any form of exclusion or prohibition, whether broad or narrow, which would in turn obviate loopholes and confusion.  It is infinitely preferable to regulate the internet (which is what carries the risk of harm) rather than to attempt to discriminate against specific technologies, systems or methods the control of which is already catered for in the Bill;

9.4.2.        apply the player protections and regulatory requirements uniformly to all forms of interactive gambling, including bookmakers, totalisators, exchanges, poker, and so forth, and not just the one.  Reintroduce (with minor amendment) paragraph 7 of the initial Bill defining the criteria of interactive gambling, in order to ensure regulation protects the players of all interactive gambling activities, and does not entrench the activities of existing licensees;

9.4.3.        protect those who do choose to participate by removing the obstacles to customer retention; and

9.4.4.        apply measures to enable rather than prevent existing offshore providers to submit to South African jurisdiction.

9.5.       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.

10.         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.

 

Submitted by:

Elliott Kernohan

General Counsel – Corporate M&A

Betfair Limited

Winslow Road

London W6 9HP

United Kingdom

 

e: Elliott.Kernohan@betfair.com

t: +44 20 8834 8221

m: +27 (0) 82 904 9796


ENCLOSURE - NOTICE NUMBER 002/2007 ISSUED BY THE NGB ON 16 APRIL 2007

(referenced in section 7.1.6.2 of the written submission)

ENCLOSURE – LETTER ADDRESSED ON BEHALF OF BETFAIR TO NGB

AND RESPONSE BY NGB

(referenced in section 7.4.3.2 of the written submission)




[1] In his Founding Affidavit to the Constitutional Court of South Africa in bringing case 152/04 against various parties, the Company Secretary of Phumelela Gaming and Leisure Limited, Anthony Wintour, states: “the operator of the totalisator does not bet against a betting client, but the betting clients bet against each other through the medium of the totalisator.”

[2] The jurisprudential importance of adequate public consultation was recently reiterated by the Supreme Court of Appeal in the matter of Chairperson's Association v 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.

[3] An example is Betfair’s exchange games collection of products, which enable players to bet at fixed odds on the outcome of casino games.  As a hybrid product, it is unclear which of the categories in the principal Act would apply, if either.