UKGC and FCA face criticism within Independent Report into regulation of Football Index

The Government has today (22 September 2021) published the independent report of Michael Sheehan QC into the regulation of Football Index, the background circumstances of which are set out in our website posting entitled “Football Index operating licence suspended (plus a summary of what led up to that & what has happened since)”.

Neither the Gambling Commission nor the Financial Conduct Authority have escaped criticism within the report (a complete copy of which can be downloaded below). Indeed, certain of the report’s findings are likely to add fuel to the fire that has already been ignited by an “Investigation into the competence and effectiveness of the regulator of British gambling, the Gambling Commission”, very recently launched by the Parliamentary All Party Betting & Gaming Group.

The main findings within the report are summarised within the Government’s below press release:

Government publishes independent report into regulation of Football Index

An independent report into the regulation of BetIndex, the providers of the novel product Football Index which collapsed earlier this year, has been published.

  • Gambling Commission has updated how it assesses risk so that novel products are properly considered
  • Gambling Commission and Financial Conduct Authority have developed a strengthened Memorandum of * Understanding to improve cooperation in wake of review
  • Review finds Gambling Commission could have worked faster to better regulate Football Index product
  • Review’s findings will feed directly into Government’s ongoing review of the Gambling Act

A review was announced by the Government in April 2021 to examine in detail the actions taken by the Gambling Commission in the period from September 2015 up to the suspension of BetIndex’s licence in March this year. It has been led by ​​Malcolm Sheehan QC.

The Gambling Commission is also carrying out a separate regulatory investigation into BetIndex Ltd on which it will report in due course, and has referred the case to the Insolvency Service. Administration proceedings for BetIndex Ltd are also ongoing which are looking at the assets and liabilities of the firm and will likely result in some reimbursement to creditors.

While Football Index was never regulated by the Financial Conduct Authority (FCA), the review also looked at how it worked with the Gambling Commission during this period and how it considered whether Football Index should also be regulated under financial services legislation.

It found that:

  • In the first instance, BetIndex did not properly notify the Gambling Commission of the nature of the product in its licence application, nor did it inform the regulator of changes to the product after launch as it was required to.
  • The Gambling Commission could have better responded to the challenges that the novel product raised once launched, with earlier scrutiny, including of the language used by the product, quicker decision-making and action, and better escalation of issues.
  • While Football Index was never regulated by the FCA, areas for improvement for the FCA have been identified, including in speed of response to requests from the Commission and consistency of messaging on regulatory responsibilities.

The report identifies lessons to be learnt and provides recommendations for both the Gambling Commission and the FCA, which they have already started responding to, and provides valuable insights which will inform the Government’s ongoing review of the Gambling Act.

Gambling Minister Chris Philp said:

I’m extremely conscious of how devastating the collapse of Football Index has been on its many customers, which is why we moved quickly to launch this independent review.

We have been clear that we must learn lessons to make sure a situation like this does not happen again. I’m encouraged to see the Gambling Commission and the FCA are taking concrete steps on an action plan on how they will better work together.

We will ensure that the findings from this review feed directly into our ongoing Gambling Act Review which is looking at ways we can improve regulation of the gambling industry.

In light of the independent review, the Gambling Commission and the FCA are already taking steps to improve ways of working going forward:

  • They have developed a strengthened Memorandum of Understanding, which includes new escalation routes to make sure regulatory impasses are identified and overcome quickly.
  • The Gambling Commission has updated its framework for how it assesses risk so that product novelty is properly considered, as well as committing to consulting on tighter rules for the terminology used to describe gambling products. This includes making clear distinctions for consumers where products are gambling, rather than ‘investments’.
  • The FCA has additionally nominated an Executive Director to oversee the relationship with the Commission, and continue to pursue its programme of change as set out in its July Business Plan.

In addition, the report asks whether more should be done to assure that gambling companies which offer long term bets are able to cover the payouts. This question will be considered as part of the Government’s Gambling White Paper, which it intends to publish in due course.

Notes to editors:

  • The Independent Review of the Regulation of BetIndex report can be found here.
  • The Gambling Act Review Call for Evidence closed on 31 March.
  • Football Index, operated by BetIndex Ltd, had a model that allowed customers to bet by buying ‘shares’ in footballers and receive returns based on their performance. The Gambling Commission suspended the firm’s operating licence in March, and it entered administration shortly after.
  • In line with the Government’s manifesto commitment to review gambling legislation and ensure it is fit for the digital age, the Government will also look at the role and resources of the Gambling Commission as part of its Gambling Act Review and intends to publish a white paper in due course.
  • BetIndex Ltd has been referred to the Insolvency Service by the Gambling Commission to ask that they consider whether the actions of the directors prior to administration breached insolvency or fraud laws. We are unable to comment on this matter further to avoid prejudicing any possible future legal proceedings.
  • A Written Ministerial Statement has been laid in the House of Commons and a copy of the report will be deposited in the House of Commons Library.

You will find Mr Sheehan’s:

  • detailed Conclusions in relation to the actions of the Gambling Commission” on pages 123 – 126 of his report and
  • conclusions and recommendations on what could have been done differently or better by the Commission and the FCA to better deliver their statutory duties in Chapter 8 (on pages 162 to 171) of the report.

The Gambling Commission has responded to the report with the following press release:

Gambling Commission responds to independent inquiry into BetIndex

The Gambling Commission has announced it will be making changes to the way it regulates innovative digital gambling products.

The announcement follows publication of the Independent Review of the Regulation of BetIndex Limited. The Review (opens in new tab) highlighted areas where the approach of both The Commission and The Financial Conduct Authority (FCA) could be improved.

Gambling Commission CEO Andrew Rhodes, who has been in post since June, said:

“No amount of explanation of what happened to Football Index will take away the justifiable hurt and anger its customers are experiencing having lost, in some cases, life-changing amounts of money when the gambling company collapsed.

We accept and agree that we should have drawn a line under our efforts sooner, but this does not mean those customers would not have lost money in the event of the BetIndex company collapsing. Throughout this case we sought the best outcome for consumers within the scope of our regulatory powers.

The review provides a number of helpful recommendations for how both regulators can work better together and for how our regulatory approach deals with novel products.

He continued:

“In recent years we have seen an increase in the complexity of business models and product offerings. The lines between what is gambling and other types of products, such as financial services or computer games, has become increasingly blurred and no longer neatly fit into existing statutory definitions of gambling.

We have already acted on a number of the recommendations in the report. This has included more explicitly including novel products as one of the factors we consider as part of our assessment of a gambling company’s risk. We have also further strengthened the Memorandum of Understanding we have with the FCA so that issues that blur the lines between financial services and gambling are escalated and actioned more rapidly.

Our actions were always focused on trying to protect consumers while we sought to bring the operator into compliance with regulations. This does not mean however that those customers would not have lost money in the event of the BetIndex company collapsing.”

The Government has announced an increase in funding for the Gambling Commission from October which will allow us to continue to improve oversight of the industry and improve outcomes for consumers.

A video statement by Andrew Rhodes can be viewed on YouTube here.

UPDATE:

On 13 October 2021, in a blog on the Gambling Commission’s website entitled Football Index – your questions on the Gambling Commission’s role and responsibilities answered”, Andrew Rhodes added to his above comments, stating:

On 23 September 2021, the independent report into BetIndex Limited (trading as Football Index) was published by the Department for Digital, Culture, Media and Sport (DCMS).

Following its publication, we’ve received a number of questions still arising from former customers regarding the Gambling Commission’s role, responsibilities and our actions.

 

Andrew RhodesSince starting in my role as CEO, I have always said I will engage where I can and I have done so extensively with customers of Football Index through Twitter, both prior to and following the publication of the independent report. While Twitter is a useful platform for many reasons it is a difficult forum to engage on complex issues such as the collapse of BetIndex Ltd.

This blog post therefore is an opportunity to set out the answers to those recurring questions that have come in the two weeks since the independent review has been published and maintain the openness that I have strived for since joining the Commission.

I want to address the key questions people have in the hope of clarifying any outstanding points or misunderstandings and have set out my responses below. There are some incorrect interpretations of the actions we took or did not take and there is a degree of misinformation and misunderstanding I want to address.

First and foremost, and before addressing these points, I want to start by saying that I am genuinely upset for those people who bet life savings and money they could not afford to lose on the Football Index platform. I fully understand the difficult situation that has left some people in.

Did the Commission license a ‘Ponzi’ scheme?

The Commission did not license a Ponzi scheme, and the independent report’s findings concluded that Football Index was not operating as a Ponzi scheme.

It’s worth highlighting, for those who may have misunderstood on social media, that a Ponzi scheme is something which falsely promises high rates of return with a low risk to investors – similar to a pyramid scheme – where early investors benefit, and it becomes riskier as you move down the chain to more recent investors. There was nothing about Football Index’s operating model when we first licensed it that made it different to other operators, except its reliance on a single product rather than a diverse portfolio.

The Football Index platform saw payments and withdrawals to customers amounting to almost £200m during its six years of operation. It is important to note that a company collapsing with money lost does not automatically make that a Ponzi scheme.

At the detailed financial assessment in early 2020, BetIndex was able to cover the liabilities in bet dividends for at least 12 months (in cash holdings) and potentially for three years if it made significant reductions to its overheads. Therefore, the company did not need to rely on new customers to meet its obligations, which is why it was not a Ponzi scheme.

Whilst BetIndex could meet its liabilities in line with its British gambling licence – the bet dividends and any winnings or unstaked money in customer accounts – in the event of the company collapsing these funds would be at risk. This is an area that sits outside the powers of the Gambling Commission and is one of the reasons why the Commission opened a dialogue with the Financial Conduct Authority (FCA) to explore opportunities for dual regulation.

BetIndex did two things during the pandemic which created a much larger exposure for its customers. It did both without notifying the Commission, which it was required to do. As customers became concerned at the lack of football activity to drive dividends, BetIndex increased its dividends by 50% and, when this did not satisfy customers, it then increased them to 100%. The company ran several promotions to boost returns to customers. In doing this, it depleted its cash reserves at a much faster rate, reducing the longer-term protection for its customers. BetIndex also changed its cash holding requirements from 12 months’ of dividends to just one month.

In these two steps, BetIndex went from having a year’s worth of cash to cover liabilities – rising to up to three years if it made serious cuts to its overheads – to essentially doubling the speed at which it was paying out this money and reducing the money it held to just one month’s worth of liabilities.

BetIndex was not recruiting enough customers to compensate for depleting its financial position in this way and ultimately collapsed as a result. It made these major changes without informing the Commission. We do not oversee gambling operator’s businesses on a day-to-day basis or monitor the financial health of operators directly in real time. That would involve a very different form of regulation to the legislation we currently have and what is funded through licence fees.

Had the Commission been made aware of the company’s actions, suspension of its licence would have come much sooner.

Will the Gambling Commission offer redress?

The Commission cannot offer redress and we have no statutory powers to do this. This is not a choice the Commission is making. Some sectors have statutory compensation schemes and others have voluntary ones. Many sectors do not have this, however, and as such in the Commission’s case, there is no fund from which any redress could be provided in the event of a gambling operator collapsing. I know this is not what people who have been affected want to hear or feel should be the case.

Legislation passed by Parliament treats gambling as primarily a leisure product and therefore it is regulated as such. To provide similar levels of financial protection that you see elsewhere, such as in financial services where there is a statutory fund available to consumers, would require a different approach to regulation in legislation.

Why did you license a product you did not understand?

The independent report didn’t conclude that the Commission did not understand the product it had licensed, but did conclude that what BetIndex operated was only partly what had been licensed by the Commission. In its license application BetIndex did not apply for permission to include the sale of bets between users, nor did it include the Instant Sell function or Market Maker. The ability to sell bets/shares between users was something the company put in place immediately, but it did so without any permission. This is a feature that sits outside gambling regulation and is something that the Commission would be likely to refuse and had done so before.

The Commission is not able to continuously monitor gambling operators and that is not what the regulatory framework or funding model has been built to do. However, when the Commission became aware of this unlicensed facility, it sought to find ways to address it, rather than take steps which would likely collapse the company and cause massive losses to customers.

We know many Football Index users did not stake money based on a three-year return in dividends but did so speculating on up-and-coming players expecting they could make a ‘profit’ in reselling those shares or bets well inside the three-year horizon. Many will have done this, but this depends on there being another user prepared to buy those bets or shares.

Others assumed they would use the Instant Sell feature to take profit in the event of their portfolio being more valuable than their stake. However, this gave users a false impression of what their portfolio was worth. The value of each ‘share’ was based on a current sale value, but this could only be realised by a small number of people. The Instant Sell feature was calibrated to reduce values as users sold bets back to the company. This was calibrated to eventually reach zero. This was done to prevent the company being faced with ‘owing’ more than it could afford if it allowed all users to sell their shares back to the company.

This is most likely why the Instant Sell feature was withdrawn during the pandemic – users would have sought to sell at a high point and exit but would have rapidly seen their value dwindle as others did the same.

The actual operating model for BetIndex was based around the three-year stake and dividend. The financial model was based around those liabilities and ‘sales’ were largely based around other users selling to each other. The user buying the share was paying another user, with the company taking a 2% commission to cover dividends. There are undoubtedly many users who have lost money where the company itself did not receive those funds, but the selling users did make money, bar for the 2% commission. The Instant Sell function was always calibrated to be limited, unless users were prepared to take a reducing price.

Why didn’t the Commission shut down BetIndex in February 2019/March 2020 when it was known they had problems?

There were a range of issues concerning BetIndex from 2018 onwards, but these were not concerning the financial viability of the company. Compliance failings by a gambling company operator can be for various reasons and are not uncommon. All operators are given an opportunity to improve and bring themselves back into compliance before we would consider suspension or licence revocation. If the non-compliance is so serious that we do not believe it is safe to allow the company to operate while they make these changes, then we will suspend their licence.

In the case of BetIndex in 2018, 2019 and early 2020, their compliance issues were related to the way they promoted the product, safer gambling controls and terms and conditions of operation. To be clear, these were serious failings and in no way acceptable.

Had the Commission suspended BetIndex’s licence at this time, it would have caused its customers to lose significant amounts of money as customers were already locked into open shares. We were always conscious that any steps we took could negatively impact on consumers already active on the platform and create a ‘cash run’. Our focus therefore was doing what we considered was best for consumers. The Commission was able to secure improvements in compliance from BetIndex but at that time, there were insufficient financial grounds on which to suspend the licence.

During our investigatory process we acted on a number of issues we identified. We: -insisted the operator review and change their website marketing to make it clearer to consumers that they were gambling, and not investing -instructed them to review and change their terms and conditions so that they were compliant with consumer protection regulations and were transparent and fair -continued to seek to work closely with the Financial Conduct Authority (FCA) to address any overlap between our jurisdictions.

We have also conducted our own internal investigation into BetIndex Ltd and have put new processes in place to pick up on novel products to ensure we hold ourselves to account in an ever-changing environment.

Why didn’t you inform us you were investigating Football Index, a product you endorsed?

We cannot talk about individual cases or businesses we are investigating. We will, however, publish sanctions once the individual or business involved has been informed and any objections to publication have been considered.

There has also been some misunderstanding that the Commission ‘endorsed’ the Football Index product. As a regulator, endorsing a product or any gambling business is not something the Commission can or would do. What we do is grant a license to operate; this does not mean the company is backed by us.

Some have claimed the Commission awarded ‘tier one’ status to BetIndex. Tier one simply means the company is now in the higher end of the market in terms of Gross Gambling Yield (GGY), which is how much money the company has made after winnings are paid and before it pays taxes etc.

You blamed Football Index Customers by saying consumers should not gamble what they cannot afford to lose.

This was never my intention.

Football Index users cannot have been responsible for the company collapsing and therefore their money being lost. Even if it was argued that BetIndex put the company at risk in trying to satisfy its customers with increased dividends it could not realistically afford, the company was responsible for that decision.

Life-changing amounts of money were gambled on Football Index and we should always urge people not to bet more than they can afford to lose. I know a lot of people were angry when I said that, and I also know many feel they did not lose their bets and their money was stolen, but money used to place a bet is always at risk, no matter how confident someone might be.

Why won’t you talk to those people affected by the collapse of Football Index?

Where I can, I have responded to many groups and individuals on social media, and answered questions both in advance of, and following, the publication of the independent review on 22 September. But I recognise that social platforms such as Twitter aren’t always the easiest or most appropriate place for such conversations.

Now the report has been out for three weeks, I feel it is the right time to talk face-to-face. That is why I have invited members of FI Group Action to a meeting at our offices to discuss their concerns. I hope a date and time for this meeting will be confirmed very shortly.

Summary

Football Index had a large and enthusiastic customer base, and some made considerable efforts to find a way to revive the company after its collapse. In February 2020, the company had enough money to pay its liabilities for a whole year without attracting any new customers. If it made serious cuts to its overheads, it could have extended this up to 3 years and potentially met all of its liabilities from the bets placed. There were non-compliance issues and practices that needed to be changed, but not severe enough at that point to stop the company operating.

During 2020, the company drastically changed its financial position without any notification to the Commission. The company went from holding significant cash reserves to meet its liabilities to voluntarily doubling its liabilities to customers without any means to replace those funds, beyond attracting new customers at a time when football was largely suspended. The company then changed its policy to hold only one-months’ worth of cash to meet liabilities. The company spent the money it had much more quickly and failed to find ways to replace it. This led to the collapse of the company.

The company did not tell the Commission what it was doing with its financial position and the risks this posed to its own customers. When the Commission became aware, it was, in hindsight, too late to prevent the losses customers then experienced. The Commission continued to try to find ways to find protections and interventions for customers outside its own powers, but ultimately did not succeed. The independent review has concluded that the Commission should have drawn a line under those efforts earlier, given what we now know happened. I agree with this, as do my colleagues.

Our findings in relation to BetIndex and its directors have been referred to the Insolvency Service for their consideration of any offences they feel may have taken place. The Commission’s own investigation has resulted in the revocation of BetIndex’s license to operate. The Personal Management Licenses of those who ran the company were surrendered by them, but the Commission will still proceed to a finding of fact in relation to their conduct as licensees in the very near future. Neither of these licensing events will make any personal difference to those who have lost their money as a result of the BetIndex collapse, but there are nonetheless matters the Commission is obliged to conclude.

While I was not Chief Executive or employed by the Commission when BetIndex collapsed, the level of contact I received when my appointment was announced left me in no doubt of its importance, and it has been a significant part of where I have spent my time since joining the Commission in June of this year.

As Accounting Officer, I take responsibility for the Commission and the actions we take as a result of what happened and there are many things we already do differently and there are things that will form part of our advice in response to the Gambling Act Review.

I hope that what I have set out does provide some insight and clarity into what happened and what the Commission can and cannot do as a result.