The UK's Coalition Government is currently working on changes to UK gambling policy, which in recent years has fostered the most open gambling market in the EU. The two strands of change proposed by the Government, however need to be justified on legitimate grounds according to EU law. Dervla Broderick, an Associate at Olswang, discusses the current situation in the EU and evaluates whether the potential changes to UK gambling policy conflict with EU law.
On 15 November 2011 the European Parliament voted in favour of a report, which argues for greater cooperation in the regulation of online gambling across the European Union (EU). In the absence of harmonised European legislation, Member States can and do regulate this complex area very differently, with many choosing to impose restrictions on foreign operators' activities, thereby restricting cross-border trade. Of course, it is now well recognised that such restrictions will, in many cases, conflict with the fundamental freedoms provided for by EU law. Although the recent report stops well short of recommending a European legislative framework which would overcome such conflicts of law, the European gambling industry remains hopeful that harmonised regulation will become a reality at some point in the future.
Somewhat surprisingly, it is against this progressive backdrop at EU-level, that the UK is now considering the introduction of restrictions on on-line gambling operators in the form of new tax and regulatory burdens, which would result in its, until now, confidently liberal regime closing its doors to competitive and consumer-friendly on-line gambling. This apparent reversal towards de-liberalisation in the UK has left the industry and its advisors questioning the government's motives. This article endeavours to address the issues raised by these developments and to consider the compatibility with EU law of the UK's proposed changes as well as also how these can be reconciled with a call for closer cross-border cooperation between European Member States.
Developments at an EU level
The report adopted by the European Parliament last November was prepared by the Committee on the Internal Market and Consumer Protection which was chaired by German MEP, Jürgen Creutzmann. The Committee's investigation ran in parallel to the Commission's Green Paper consultation and collected views from across the industry. The report's overarching argument is for greater coordination in the regulation of online gambling across the EU and its recommendations range from a call for a European Directive on consumer protection and betting fraud to a request for common standards on licensing. While recognising that the unique nature of gambling as a service may justify regulation at individual Member State-level, the report suggests that a lack of coordination between Member States distorts the competitive environment, permits grey and black market gambling to thrive on the internet, and fails to protect potentially vulnerable gambling consumers.
The report also urges the European Commission to pursue more vigorously Member States whose national gambling legislation is inconsistent with EU law. There are currently a number of countries which are targets of the Commission's action - but to date no Member State has been referred to the European Court of Justice. (Indeed some of the Commission's outstanding cases stretch back as far as 2008.) The Commission needs to be seen to prosecute Member States whose national regulatory regimes are not compatible with EU law in order to be a real driving force for cross-border online gambling.
Mr Creutzmann's report has been welcomed by gambling operators for its recommendations in favour of an EU-wide approach to online gambling regulation, in stark contrast to the 2009 Schaldemose Report - also approved by the European Parliament - which warned against regulation at an EU level. Without a doubt it is a significant shift in the right direction and with Michel Barnier, the European Commissioner responsible for the internal market and services, announcing his intentions to publish an action plan on online gambling by the middle of this year, it seems that closer cooperation in this sector may be something more than a distant aspiration. Speaking in Strasbourg in advance of the Parliament's vote, Mr Barnier also undertook to foster a collaborative dialogue between the national gambling regulators of EU Member States in order to overcome the apparent lack of trust that exists between these bodies and to encourage increased cooperation.
The UK, since the Gambling Act 2005 came into force on 1 September 2007, has been the most open gambling market in the EU. Under this regime operators registered in other EEA Member States, Gibraltar or 'White List' jurisdictions - namely, Tasmania, the Isle of Man and Alderney) - can offer gambling services to UK citizens and may lawfully advertise their services in the UK subject to the advertising rules. Currently, operators licensed in the UK pay a gross profits tax of 15 per cent, while operators based offshore pay tax where they are licensed at generally much lower levels. As a result, the majority of UK-facing remote gambling operators are now established in jurisdictions such as Gibraltar, Alderney, Isle of Man and Malta where they can lawfully target UK customers, while paying taxes which are materially lower than those in the UK.
The main benefactors of the UK's approach to regulation are UK punters who have access to an extremely competitive on-line betting marketplace. Indeed, the UK is the world's largest legal online gaming market (although is likely to be soon overtaken by Italy). The UK's online gambling population is generally quite sophisticated with many holding accounts with multiple operators in order to take advantage of the best available deals. Given the fierce competition between them, the operators themselves are working to increasingly low margins.
The present Coalition Government is currently working on two inter-related strands of change to gambling policy. The first involves changes to the licensing regime which would require operators based in overseas jurisdictions - who are targeting UK consumers - to be licensed by the UK Gambling Commission. On 14 July 2011, John Penrose, the Gambling Minister stated that 'The current system for remote gambling doesn't work. Overseas operators get an unfair advantage over UK-based companies, and British consumers who gamble online may have little or no protection depending on where the operator they deal with happens to be based. So our new proposals are an important step to help address concerns about problem gambling and to plug a regulatory gap, ensuring a much more consistent and high level of protection for those people in the UK who gamble online.'
The second proposed change, which is very much seen by the industry as the main reason for the proposed licensing modifications, involves the potential introduction of a 'point of consumption' tax, which would tax online companies on the basis of location of their customer. The announcement of this potential new tax was made by Justine Greening, Economic Secretary to the Treasury, just four days after Mr Penrose made his remarks in relation to the licensing regime. It is not known whether the level of tax introduced will be the same as the current gross profits tax of 15 per cent paid by UK licensed operators.
These proposed changes raise significant issues from an EU law perspective. Firstly, the European Courts have held that financial objectives such as increasing tax revenues are not legitimate grounds for justifying restrictive measures. Accordingly, the proposed changes to taxation cannot stand alone without some form of justification. The European Courts have repeatedly stated that financial objectives behind national legislation will not defeat the legitimacy of a measure if that measure was justified by other public interest requirements, so that financial benefits were only incidental - hence the perceived requirement for changes to licensing of operators.
However, there appears to be a major gap in the Government's argument: there is no evidence to suggest that the existing licensing regime for remote gambling 'doesn't work'. A recent consultation carried out by the Department for Culture, Media and Sport failed to prove the case for any regulatory change. In restricting the list of countries in which operators can be licensed to certain approved territories, the UK gambling regime has already succeeded in ensuring that operators are subject to strict regulatory scrutiny. Indeed, in discussing the criteria for jurisdictions being placed on the 'White List', the DCMS consultation stated: 'The government does not demand that a jurisdiction's licensing and regulatory regime must mirror the UK: the key question is whether a jurisdiction has embedded within its regulatory regime the same core values which underpin ours. That is to say, that they too regulate gambling in order to protect children and vulnerable people from being harmed or exploited; to keep crime out; and to ensure that gambling is conducted fairly, and that they have the facilities and resources in place to ensure compliance and enforcement with those values and the regulatory regime in operation'. Without being able to demonstrate a sufficient justification for the taxation changes in this manner, UK gambling policy will, for the first time, be open to challenge under EU law.
In addition to these legal hurdles, the Government also faces the prospect that a place of consumption tax will increase black market gambling, drive some operators to divert their business to other jurisdictions and force others out of business altogether. All of which is likely to mean a worse - not better - deal for UK punters.
Given that the proposed policy changes would, in effect, close one of the EU's only fully open markets in the EU, it is expected that it will face significant challenges from gambling operators whose businesses will be severely impacted in the event that the new policy is implemented.
This article was first published in the World Online Gambling Law Report Journal.