Posted by Woods Whur | Gambling, Licensing Law

The Gambling Commission (“GC”) has been busy in the last month or two in the lotteries sector, reminding society lottery operators and External Lottery Managers (“ELM”) of what it expects to see in terms of transparency and reinforcing its message that lotteries must be the preserve of good causes, and not be run for commercial gain. It has also issued some advice on the latest new trend in the lottery market – enabling players to sign up and play via SMS.

The lottery sector is evolving and diversifying all the time and, perhaps as an inevitable consequence of this, the products on offer may stray into realms which the GC considers to be of higher risk than traditional lotteries or raffles, and also less easily distinguishable from other types of gambling activity.

From 4 April 2018 all lotteries will have to make it clear to all players, before they buy a ticket, in exactly whose lottery they will be participating in, that is to say, exactly which society or charity the “good causes element” of their ticket money will be going to. This new Social Responsibility Provision is aimed at lotteries that are promoted under one “umbrella” brand. Perhaps more importantly, another new Social Responsibility Provision that will come into force on the same day will require societies to publish the percentage of lottery ticket monies applied directly to the good cause in the previous year. This needs to be done either through the society’s lottery page on its website, in its Annual Report or via any other means that are reasonable and proportionate, depending on the size and scale of the organisation.

This requirement to disclose percentage of actual charitable spend has given rise to concern for some. There are fears that it might lead to certain elements of the press, for example, drawing unfair and misleading comparisons between charities. My advice throughout has been that the requirement to publish the percentage does not preclude publishing accompanying information, such as the total amounts raised and applied to the good cause since the lottery scheme’s inception and how long the lottery has been operated for, for instance.

These changes result from a consultation on fairness and openness in lotteries conducted by the GC between 20 July and 30 September last year, and the GC has continued its drive for transparency, issuing a warning in December to all lottery operators following an adverse ruling by the Advertising Standards Authority (“ASA”) on 22 November, which arose from complaints about how The Health Lottery advertised some of its prizes.

The offending advertisement appeared on Facebook. It read:

You know what they say: five chances to win is better than one, that’s why we run five weekly draws! What’s more, each draw has a jackpot of up to £100k – that means that there is a potential half a million pounds up for grabs week in week out… Up to £500k can be won every week. That’s 5 draws per week each with up to £100k jackpot Tuesday, Wednesday, Thursday, Friday and Saturday… Still only £1! That’s half the price of Lotto! Play now #EverybodyWins.

The complainants, aware that the jackpot won was usually significantly less than £100,000, questioned whether the statements about a jackpot of up to £100,000 and total prize pot of £500,000 per week were misleading. The Health Lottery argued that the purpose of the advertisement was to highlight the fact that they operate five draws per week, each with a top prize of £100,000, making it possible for members of the public to win up to £500,000 in total. They insisted that, based on the normal volume of ticket sales, top prizes of £100,000 were a realistic expectation. However, the ASA noted the prize limits in the Gambling Act (“GA2005”), which currently restrict the top prize in a Large Society Lottery to £25,000 or, if more, to 10% of ticket monies. Given that ticket monies in any particular Large Society Lottery draw are limited to £4m, this means that the absolute maximum theoretical prize that may be won in any Large Society Lottery is £400,000.

The Health Lottery stressed that it had discussed the wording of its advertising with the GC, with a view to striking the appropriate balance between the highest top prize of £400,000 if there was a large number of ticket sales, and stating the minimum top prize of £25,000. It said that there had been 264 jackpot winners since The Health Lottery’s inception in 2011, of which 61% (181) had won a jackpot of £100,000 and 71%, £50,000 or more. It also pointed out that its method for calculating prizes is set out in its terms and conditions which, in turn, had been approved by the GC.

All of this notwithstanding, the ASA found that the advertisement was, indeed, misleading. Although there had been winners of £100,000 jackpots in the past, the possibility of winning £500,000 in a week by winning the jackpot in five consecutive daily draws had only existed since February 2015, when the scheme involving five weekly draws was introduced. Since then, no player had won a £100,000 jackpot. Accordingly, although the figures given in the advertisement were qualified by the words “up to”, the ASA held that they no longer represented a realistic amount that was likely to be won as a jackpot in any particular draw, given the 10% rule in GA2005.

The ASA therefore ordered The Health Lottery to withdraw the advertisement in its current form and instructed them not to exaggerate the likely winnings available. The GC has now passed on that warning to other lottery operators, saying that any information published about prizes must be presented in a clear, transparent and unambiguous way so that consumers are entirely clear about the prizes on offer and that, in particular, advertisements must not mislead by exaggeration. The GC advice, with a link to the ASA findings, may be viewed here: http://www.gamblingcommission.gov.uk/news-action-and-statistics/news/2018/Is-the-advertising-for-your-lottery-misleading.aspx

The GC has also taken the opportunity to remind the lottery industry about lotteries being confined to good causes, rather than being a commercial opportunity. Last week, it issued guidance, both on societies running lotteries on behalf of good causes, and on the limited ways in which commercial private sector businesses may be involved in fundraising, either by promoting their own lotteries or by supporting lotteries promoted by charities and other good causes.

Societies can run lotteries to raise funds for other good causes, provided that their aims and objectives allow them to do so. I have advised in a number of cases where the currently prevailing aims and objectives did not permit this, but we were able to achieve the societies’ ambitions by widening their aims and objectives to include raising funds for additional good causes.

The GC (or Local Authority, if the society is running a Small Society Lottery registered with them) should be notified of the amendment to the aims and objectives as a Key Event, as soon as reasonably practicable and, in any event, no later than 5 working days after the amendment takes place. The society would also need to check that their new aims and objectives are compliant with charity law.

Societies promoting lotteries on behalf of other good causes must also be careful to ensure that all players clearly understand that they, and not the beneficiary or beneficiaries of the lottery, are the promoter, and that there is full transparency as to the cause that the lottery is actually benefitting, that is to say, where the “good causes element” of their ticket monies is actually going.

The GC has also reminded commercial private sector businesses that lotteries may not be run for private or commercial gain, and last week issued a Guidance Note on the limited circumstances in which such a business may become involved in fundraising through this means. Briefly put, the company must set up a separate non-commercial society, which must get itself licensed as a society (or registered as such with the Local Authority in which their Head Office is situated, depending on projected turnover) or licensed as an External Lottery Manager (“ELM”), depending on whether it is the promoter of the lottery, or merely managing all or an aspect of, it as an ELM on behalf of a society.

Commercial entities can also run incidental lotteries at an event such as fundraising dinner or fete, or set up a workplace lottery for its staff, if it wishes to raise funds for charity. However, very specific rules apply to all such schemes and advice should be sought before launching one to ensure that the particular scheme satisfies all of the legal requirements in order legitimately to be considered exempt from regulation and the need to obtain a licence or registration.

Another subject which the GC has its eye on at the moment is lotteries via SMS. I think that it’s fair to say that this is one of the “hot topics” of the moment for the sector and I am dealing almost daily with queries from operators who are seeking to capitalise on this undeniably massive opportunity whilst, at the same time, striving to be compliant.

Last week, the GC issued a Guidance Note on the subject, which may be found here: http://www.gamblingcommission.gov.uk/for-gambling-businesses/Compliance/Sector-specific-compliance/Lotteries/Using-SMS-short-codes-for-lottery-promotion.aspx

This Note broadly reflects the discussions I have been having with the GC over the last few months on this subject, and I think that we all have the same broad areas of concern. These surround, firstly, social responsibility, including how to implement self-exclusion checks, assess the risk of problem gambling, impose limits on numbers of tickets sold and carry out age-verification checks. Secondly, the concerns surrounding money laundering (albeit, these are acknowledged by the GC to be low in the case of subscription lotteries) persist.

Thirdly, Licence Condition 11.1.7 (and 11.2.7 for ELMs) requires all players in a lottery to be provided with a “ticket” containing certain prescribed information (whether as a paper document, or as an electronic document that is capable of being downloaded and/or printed) . The question therefore arises as to who will be issuing the ticket and, if it is to be the SMS provider, whether the software required to do so needs to be licensed under a gambling software licence.

Fourthly, Licence Condition 11.1.1.9(c) requires all ticket monies to be paid to the relevant society before the draw takes place. I have advised on a number of cases involving this issue, and am confident that, as long as funds are ring-fenced, that the agreement between the SMS provider and the society provides for the lottery proceeds to be held on trust for the society, and to be transferred to, or collected by, the society within a reasonable period of, say, 14 days, this should be compliant.

Fifthly, operators will have to be very careful to check addresses of players – with only a mobile phone number to go on, additional verification will be required, to ensure both that lottery tickets are not being sold in a jurisdiction where it is unlawful to do so, or unlawful to do so without the appropriate licence, and also that players are not committing an offence in their own country of residence by purchasing lottery tickets remotely.

My residual concern relates to the requirements surrounding gambling software. I cannot see how any SMS provider can link in with gambling operators (for example, issuing a compliant ticket) without adapting their software specifically for gambling (the GC’s test as to what does, and does not, constitute gambling software). In my view, the jury is still out on this issue.

There is still a great deal of work to be done before the industry plunges into SMS. SMS is indisputably a great opportunity, but it is a real challenge from a compliance point of view. We will continue to monitor developments in this area and report back in further editions of this Newsletter.