KPMG eSummit Gibraltar

23rd and 24th April 2015

A word from the Sponsor

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Kindly sponsored by

For over twenty years, Gibraltar’ssimple eGaming philosophy ofassuring robust, sensible andproportionate regulation and a real bricks and mortar presence from quality operators has resultedin its becoming amongst the most trusted and envied jurisdictions in the world.

Today, Gibraltar is home to over 3,000gaming sector employees, over 34licensees and a complementarycluster of ancillary service providers,creating a community of excellence inebusiness as well as a fast paced andexciting, world-reaching economy.Indeed, as the Gibraltar Government,the GBGA and a host of public andprivate sector stakeholders togetherembark upon a review of Gibraltar’sgaming legislation and regulation;Gibraltar’s future as a leader intechnological advancement andconsumer protection which is at the forefront of any regulatory regime in the world, is assured.

On the 24th and 25th April, 2015, over 240 delegates boarded theSunborn Gibraltar to join KPMG for the fifth in a series of eSummits inGibraltar and a two day programme of40 world class presenters. Together,they discussed not just the future of the eGaming industry, but also itsleading role as part of a global digital economy.

The Hon. Albert Isola, the GibraltarGovernment’s Minister for FinancialServices and Gaming kindly openedproceedings by expressing Gibraltar’sfirm and total commitment totransparency and exchange ofinformation, whilst celebrating itssuccess in remaining a compliant,cooperative, business friendly andconsumer focused jurisdiction.Gambling Commissioner Phill Brearthen took to the stage with anintroductory overview of Gibraltar’sgaming economy before moderating a comprehensive panel review ofgambling regulation in Gibraltar withparticular emphasis upon the processof updating Gibraltar’s Gambling Act2005 and licensing arrangements to create an enabling legal andregulatory framework.

Eris Industries’s Preston Byrne tookover for the summit’s first coffee and conferencing session with a

fascinating discussion of the countlesspotential applications of the Blockchain2.0 in today’s digital environment after which MasterCard’s AndrewJohnstone followed as moderator to a distinguished panel of paymentspecialists who together tackledemerging payments in their form,application and function. Followinglunch, Peter Howitt of the GBGAmoderated an exciting and frank panel discussion on the role of socialresponsibility in gaming whereesteemed panellists, includingrepresentatives of the Senet Group,shared their thoughts on stakeholderresponsibility, the role of the mediaand politicians, and as a closing note,the importance of public industrycollaboration on the matter.

Tim Stocks of Taylor Wessing took overwith a highly informative presentationentitled “Red Carnations and SlayingDragons” in which the public marketsspecialist provided his audience withan evaluation and forecast of M&A and overall market activity within theglobal eGaming sector. Mr Stocks was followed by Paul Lasok, QCwhose coffee and conferencingpresentation allowed unparalleledinsight into the implications of FiscalNeutrality and VAT in the EuropeanUnion from an individual well placed to discuss the issue. A final panelsession, moderated by PeterMontegriffo of Hassans, closed Day 1 with a discussion on theevolution of gambling from theparticular perspective of the operator at a ‘point of reflection’ for the industry.

Day 2 saw delegates return to theSunborn to be welcomed by KPMG’sHead of eBusiness, Archie Watt,following the previous evening’s galadinner hosted by the Government ofGibraltar at St Michael’s Cave. Theevolution of gambling, this time fromthe regulator’s perspective, was thefirst topic of discussion as the panel ofregulators Phill Brear, Hakan Hallstedtand Jenny Williams, moderated byIMGL President Joerg Hofmann,debated the importance of regulatorpersonality, accessibility andindependence. Conference regularPaul Leyland then took over to deliverthe penultimate presentation entitled‘The Multi-channel Value Equation’ inwhich Mr Leyland contemplated thebenefits and disbenefits of the

industry’s latest focus: omni-channelpresence. Providing the finalpresentation of the summit wereMartina King and David Excell ofFeaturespace, whose captivatingpresentation narrated the company’sdevelopment from a CambridgeUniversity laboratory experiment to a critical provider of big dataanalytics, analysing its deployment and huge potential within eGamingand ebusiness.

This year’s summit represented an evolution of the traditional format to also include four additionalbreak-out sessions in parallel to themain programme. The InternationalMasters of Gaming Law (IMGL)returned to provide two Masterclassbreak-out sessions both of which left standing room only as delegatesrushed to find out more about theM&A environment for eGaming and the European legal viewpoint.The Gibraltar Betting and GamingAssociation (GBGA) meanwhile ran the first of its responsible gamblingseminars, a key topic of the day, while later in Day 1 a blockchain,cryptocurrency and FinTechcommercial workshop set the tone for an afternoon’s insight into thefuture for ebusiness transactions.

This report seeks to provide an insight into the event’s findings as well as capture the enthusiasmgenerated over a summit characterisedby a sense of cooperation and socialresponsibility at this important juncture for the gaming and, morebroadly, ebusiness economies. KPMGwould like to thank the summit’ssponsors, speakers and attendees and welcome you all to the KPMGeSummit series in 2016.

KPMG employs a number of eGamingindustry specialists both in Gibraltarand globally and is committed tocutting through the complexity of this constantly evolving industry.

Introduction

A secure, transparent and constantlyevolving centre of excellence forebusiness, Gibraltar is home to some of the most reputable brands in eGaming today and one of ten hosting centres inContinent 8’s global network.

Since beginning operations in Gibraltarin 2012, Continent 8 has enjoyedunprecedented demand for our hostingand networking services. From ourunique datacentre, which is located500 metres within the Rock ofGibraltar, we continue to invest inGibraltar’s eGaming and eBusinesscommunities and remain committed to providing a level of excellence as standard.

This year’s Summit was testament tothe agility and resolve, as well as thevast potential of Gibraltar’s ebusinesscommunity today. Continent 8 is proudto sponsor this year’s KPMG eSummitreport and we look forward to seeingyou again next year at the KPMGeSummit Gibraltar, 2016.

Richard EbbuttContinent 8 Technologies

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A third generation member of thefamily-owned law firm Isolas, whichhas been doing business in Gibraltarsince 1892, the Hon. Albert Isola wasadmitted to the Bar in England andGibraltar in 1985 and was appointedas the Gibraltar Government’sMinister for Finance and Gaming inJuly 2013. Since then, Mr Isola hasoverseen the continued expansionof Gibraltar’s eGaming communityto now accommodate over 3,000employees as well as 28 licensees,and has been instrumental insecuring the jurisdiction’s reputationas a global centre for eGaming.

“I think I’d like to start by saying onething about Gibraltar PLC and itsoutlook in terms of business”, MinisterIsola introduced KPMG’s fifth eSummitin Gibraltar. “And I think I’d like tostress how important it is to us thatthe journey we’ve embarked on is atotal commitment to compliance.Gibraltar is totally committed totransparency and exchange ofinformation. There isn’t one accord,one agreement, one convention, in relation to these areas that we’renot fully subscribed to, so when wetalk about FATCA, and the CommonReporting Standard, Gibraltar was one of the early adopters and totallycommitted to that area of compliance.”

Minister Isola continued byemphasising his pleasure in confirmingthat Gibraltar is subscribed to 130exchange of information agreements,

as well as all appropriate directives. He emphasised the importance ofbeing a part of Europe and of theimportance of remaining proactive inthe international regulatory debate.“Being a part of Europe is important to us, and of course it’s also importantto us that we comply. There isn’t asingle EU directive which we’rerequired to transpose which wehaven’t. Those are obligations whichwe take seriously and you shouldknow that when you come to Gibraltaryou are coming to a totally EUcompliant onshore jurisdiction.”

“As many of you will know, for overtwenty years we’ve had a very simplephilosophy: quality operators, robustand sensible and proportionateregulation, and a real presence. Those principles have guided ussuccessfully for many years to wherewe are today. Of course, it’s alsodesigned to protect, preserve andindeed enhance our reputation as what we consider to be the onlinegaming jurisdiction in the world.”

Minister Isola confirmed thatGibraltar’s eGaming sector currentlyconstitutes over 3,000 employees and 34 licensees; an increase of 8licensees since the 2014 KPMGeGaming Summit. He reminded the audience that a large number ofthese licensees, 8 or 9, were involvedin acts of consolidation, meaning theselicence numbers may not remain, butcompany presence will. “And this,

despite the many challenges we’vefaced over the years; PoC tax,jurisdictions introducing their ownregulatory regimes and, of course, theworld economic crisis. Today, we are100% bigger than we were five yearsago. That’s staggering considering thechallenges you’ve all faced. And, ofcourse, for us as a jurisdiction the icing on the cake is that the mainoperators in the sector are all here and represented in Gibraltar.”

“So I think it’s an example of howgovernment and the gaming sector,and more broadly the private sector,can work together to battle throughtough times, to meet challenges andto face them together. Consider whatwe now have - a collection of skills,nationalities, languages, experience,expertise, in a very exclusive sector –and all within two square miles. But, ofcourse, that really isn’t the end of thestory; if we want to keep that, andgrow that, and if we want to get betterat what we do, it’s important that wecontinue to focus, we continue to lookforward and we continue to worktogether to find the solutions that willput us in a better place in five, ten,fifteen years’ time. What we’re talkingabout really is a centre of excellence:Gibraltar as a centre of excellence forthe gaming community. That’s wherewe as a government will focus ourenergies in looking at the gamingsector. Above all else, it’s our intentionto do it holding your hands and doing it together every step of the way.”

The strength of its regulation and,indeed, regulatory team remainsabsolutely fundamental to Gibraltar’seGaming proposition and it was withdelight that Minister Isola confirmedthat Phill Brear will remain GamblingCommissioner for a further two years.During this period, Mr Brear willimplement a full succession plan to ensure that licensees continue to enjoy the benefit of his advice and expertise. “A formal handover will also be created”, Minister Isolaconfirmed, because we recognise that consistency in our regulatoryenvironment is crucial to all of your businesses.”

“A second area is virtual currencies.For the past six to eight months, the Gibraltar Government has beenengaged with a working group andconsulting widely, across all sectors, to see whether or not we should beintroducing the virtual currency spaceinto Gibraltar and, if so, how we should regulate it and impose thesafeguards that we require in anybusiness. We are at the stage todaywhere the working group hascompleted its work, has provided its report to government and I amworking on a cabinet paper to lead to a final determination on where we will go. I expect that will lead tofurther opportunities if it goes the way I think it will, but always againstthe context of the need to ensure that whatever we do protects thejurisdiction from adverse risk.”

“Responsible gaming has been apriority from our very beginning.Gilbert Licudi is driving the GibraltarUniversity, which opens its doors in September 2015, and we haveidentified gaming as an industry inwhich the university has a role to play.We want to bring together gaming andstudents and see how, together withthe many companies here today, we can work to put Gibraltar at theforefront of responsible gaming.”

“Finally, a total review of our gaminglegislation. It has worked, but it hasworked in different sorts of ways.What we are doing now, and havedone thus far, has been to instructwhat I consider to be the four leadinglights in the gaming community towork in the interests of Gibraltar PLCand improve the way in which weregulate gaming in Gibraltar. I don’tthink there’s a better jurisdictionalreflection of excellence than this groupof individuals and their bid to ensurethat Gibraltar’s legislation is fit forpurpose, proportionate and robust.With our recommendations in place, I hope to be able to consult with youcollectively and individually. I do intendto communicate with you all to makesure you understand what we’redoing, why we’re doing it and whatyour thoughts are. It is very much atotal consensus approach. My door is always open and you have theGibraltar Government’s full support.Thank you, and enjoy the rest of the day.”

The Hon. Albert Isola Minister

Gibraltar Government

ConferenceOpening

“Gibraltar is totallycommitted to transparencyand exchange of information.There isn’t one accord, oneagreement, one convention,in relation to these areas thatwe’re not fully subscribed to.”

The Hon Albert Isola

“It is very much a total consensusapproach. My door is always open and you have the GibraltarGovernment’s full support.”

Sir Peter CaruanaPeter Howitt Peter Montegriffo Steven Caetano

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Phill Brear was appointed as Head ofGambling Regulation for Gibraltar inOctober 2007 following two years asDirector of Operations with the BritishGambling Commission. In July 2011,he was appointed as Gibraltar’sGambling Commissioner in additionto his existing responsibilities. Havingplayed a leading part in the roll-out ofthe UK Gambling Act and gainedexperience across the breadth of theBritish gambling industry, the switchto Gibraltar, ‘home to the world’sleading online gambling operators’,brought a new set of challenges, withGibraltar’s adoption of its newGambling Act. Since his appointmentPhill has steered through a series ofchanges to the regulatory regimewhilst working closely with operatorsand their representatives on a wide range of operational andorganisational issues. Phill is alsoresponsible for liaising with bodies as challenging as US regulators and the European Commission.

“We have here the founders of theremote gaming industry in Gibraltar”, Mr Brear introduced an overview of the initiation of Gibraltar’s review of itsgambling legislation, and licensing andregulatory model. “There isn’t an onlineoperator in Europe and, possibly, theworld who doesn’t know of theseindividuals and hasn’t used theirresources to navigate the complex world of online gaming in the past.It’s an amazing team we have here.”

Mr Brear continued in clarifyingGibraltar’s goals as it embarks upon areview of its gambling licensing andregulatory regime. He emphasised thatwhilst there is a collective drive to moveforward with revisions, continuity andthe future-proofing of Gibraltar’sproposition remain of paramountconcern. “This is not about startingagain, it’s about building upon whatworks”, Mr Brear maintained, “and ifsomething is broken, we will fix it.” He then turned to Sir Peter in asking the first of the day’s panel questions.

How did we arrive at this point, and what are the drivers for change in Gibraltar?

Sir Peter Caruana: “The story ofGibraltar’s involvement in this excitingindustry is, I think, relatively well knownby most”, Sir Peter began. “Its successcan be attributed in the first instance tojust a few words: a commitment fromthe very outset, and from successivegovernments of Gibraltar, to excellence.We did not want to be all things to allmen, and we knew that protecting ourreputation meant limiting the people we let in as operators to those whoshared the same concern for theircorporate reputations as we do for our jurisdictional reputation.”

Sir Peter explained that this approachquickly led to a policy decision for what has become known as ‘selectivelicensing’, whereby Gibraltar eschewsvolume in favour of quality. Of thehundreds of licensing applicationssubmitted, only a handful of applicants

have been granted presence in Gibraltar,becoming stakeholders alongside the government and the rest of thedomestic industry, all of which fosters a common vision.

This selective approach to licensing, Sir Peter continued, allowed for a lighterregulatory touch coupled with a sense of self regulation, which was deemedaffordable in terms of safety becauseGibraltar had been selective andrestrictive in the first instance. Indeed,this policy became attractive to largeoperators who identified Gibraltar as ajurisdiction whose vision and regulatoryobjectives they shared.

“So there was a constant assessment of the balance between a sufficientmeasure of regulation to protect thejurisdiction and consumers, and at thesame time having an equal degree ofsensitivity for the needs of an industrywhich we knew was nascent and whichwas and still is in a constant state ofevolution”, Sir Peter recalled. “It wasimportant that we weren’t too rigid in ourpolicies. Whilst we had certain coreelements that were designed to makesure that Gibraltar was a brick andmortar, and not a brass plate jurisdiction,and that we had sufficient oversight andhandle on our operators; we couldn’t beso rigid that we prevented companiesfrom developing. We coupled this withan emphasis on quality of life: issuessuch as safety, education, travel, an openlabour market, and a very supportivecommunity. These issues may not seemso but they are also crucial to ourproposition.”

“So, to summarise; successivegovernments have supported, but moreimportantly, understood this industry. As a result they have been able to makeadministrative, encourage regulatory, andalso made legislative decisions whichhave been propitious for the safe

development of this jurisdiction as one of the foremost for online gaming.”

Mr Brear agreed, adding that there is acommon understanding that theinfrastructure of the industry is changingwith its growth and multiplication, “sothe entry points into licensing need to be revised. This control and definition ofwho should and may be licensed is alaunch pad of the regulatory model.”Turning to Peter Montegriffo, who iscredited with coordinating Gibraltar’shistorical approach and modernising itsregulatory regime, Mr Brear then asked:could you elaborate on anydevelopments?

Peter Montegriffo: The 2005 GamblingAct, which currently regulates gaming inGibraltar, was conceived at a time wheninternet gaming was very different, MrMontegriffo pointed out. “Back in 2005the EU debate on a cross-border,liberalised market was very alive, thetechnology was very different in terms of delivery and the controls required. The role of hubs like Gibraltar was alsovery different. The 2005 Act was struckcorrectly at the time both because itreflected that environment and it wasdesigned to provide latitude and flexibility for this industry as we knew it would evolve.”

“This now needs to be looked atbecause the world and the landscapehave moved considerably. Of course,Gibraltar has adapted to the newbusinesses within the parameters of the Act successfully, but it has had tostretch some of the concepts. Forexample, we license B2B operations in Gibraltar though our legislation wasmore properly conceived for B2Cs. So,there’s a need to look at the criteria forlicensing in terms of what triggers therequirement for a licence, such as apiece of remote gambling equipment inGibraltar, and we need to evaluate what

is currently a single form of remotegambling licence.”

Mr Montegriffo elaborated, adding thatmany other ‘hub’ jurisdictions utilise arange of licences which might includeB2B, disaster recovery, and otherperipheral activities which are thenconnected to the mainstream gamingactivities which are regulated. “Thesejurisdictions have sought to create spacemore specifically for the differentelements of the gaming industry as itdiversifies and becomes more complex.In revising our frameworks, we’reinterested in accommodating that samereality and enabling ourselves to policethe perimeter; that is to say police thosecompanies outside of Gibraltar but whichnevertheless seek to establish some sort of link to the jurisdiction, potentiallyraising reputational issues. So whatwe’re looking at is how to redefine theboundaries of our licensing, so that wemay better police those that lie outsideof the boundaries.”

Mr Montegriffo then reiterated the factthat Gibraltar’s basic approach and itsvery selective requirements for entrance– the need for substance, accountabilityand presence in Gibraltar – are unlikely to change. He stated that the review is therefore very much one of“modernising, revamping, empoweringand making more relevant the businessthat we have here, and building aplatform for its continued expansion.”

How might we define what liesbeyond the boundary of Gibraltar’sregulatory reach?

Steven Caetano: “We looked at thecommercial rationale for potentiallyregulating the unregulated or non-traditional gambling products which areout there, and we looked at the existinglegal regime here, and we saw that thelegislative framework is wide and robust

Moderator: Phill BrearGibraltar GovernmentPanel Session:

The Review of GamblingRegulation in Gibraltar Update

“Successive governmentshave supported, but moreimportantly, understood this industry.”

Panellists

Peter Howitt, Founder and Director, Ramparts

Sir Peter Caruana, KCMG, QC

Peter Montegriffo QC, Partner, Hassans,

Steven Caetano, Partner, Isolas

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enough as it is”, said Mr Caetano, whokindly stood in for the programme’soriginal speaker Peter Isola. “We couldregulate something like social gaming,for example, with small extensions to theexisting framework. Then we looked atthe arguments for and against regulatingsomething like social gaming. We foundan equality of arguments and that,ultimately, it was the practicalities ofenforcing regulation that would informour decision to regulate and whetherthat’s more appropriate matter forconsumer regulation. What we’ve done is set out the new potentialdevelopments in the industry thatcurrently lie outside of Gibraltar’sregulatory boundaries, the advent ofcryptocurrency for example, and we will monitor these developments in order to be the first to embrace and regulate accordingly if we deem it appropriate.”

Is there a synergy or not between e-commerce, e-currencies andeGaming?

Peter Howitt: Notable for his expertise on the convergence of and overlapsbetween eGaming and financial services,Mr Howitt explained that one of his areasof activity as part of Gibraltar’s reviewwas looking at the potential to ‘borrow’principles based financial servicesregulation for application withineGaming. “From a wider perspective,however, it is interesting to first look at the history of gambling, particularlyoutside of the UK and on the Continent”,he noted. “Gambling is coming from aplace quite different from banking andother financial services but it does seemwe’re moving in the same direction interms of concepts relating to theprotection of consumers, treatment offunds, treating customers fairly, etcetera.It is also clear that there are shared areasof sensitivity relating to operators andthe management of public policy issues.It is interesting that online gambling isstarting to be seen in the same way asfinancial services, and that presentsopportunities and some risks.”

One such example, Mr Howitt went on,was the forthcoming 4th EuropeanMoney Laundering Directive (4MLD)which, although previously identified as athreat, may also present an opportunityfor eGaming. “The 4MLD represents acoming of age for online gambling whichcan now be talked about in the same

breath as financial services. It’s also anopportunity to gain some of the benefitsenjoyed by financial services such asdoing business across borders.”

Looking at the current legislativeframework in Gibraltar, Mr Howittexplained that the jurisdiction has the2005 Act, bi-lateral private contactsbetween the government, operators andlicensing authority, and codes of practice.He emphasised that commercially andreputationally Gibraltar has enjoyed greatsuccess, but that the current process ofappraisal allows Gibraltar to look at howbest to showcase these strengths anddemonstrate how it meets its objectives.“The focus for me in the process of thisreview is to make sure we really highlightwhat Gibraltar is very good at and use it as a chance to make explicit whatGibraltar does well every day. One of thethings I personally like in terms of theway Gibraltar does business andregulates gambling is that ours is a veryhuman led form of regulation, and wedon’t want to lose sight of that in thisreview. In some jurisdictions there arecopious amounts of documentation, butlimited interaction with operators and it’sdifficult to see that as the best form ofregulation. In this review, we have tomake sure that we look at the structureof the Act and the licence agreementsand move to a more principles basedapproach where the regulating authoritysets out their stall, identifies theirobjectives and what their role is as astakeholder. It then needs to give theoperators conditions for licensing whichmake it clear that there are certain things that they must do which aren’tnecessarily specified in particular parts of legislation, but which are fundamentalto the proper functioning of a gamblingmarket that protects consumers andprotects stakeholders. We want to makechanges that really put Gibraltar at theforefront of any regulatory regime in the world.”

Phill Brear: “There are, basically, twomodels of licensing out there. Onemodel is high entry point, limitednumbers, which we see a number of jurisdictions effectively adopting. Then there’s a different model of largenumbers, possibly low entry point. Here, it’s quite clear that there is acommitment to continue on the samepath of a small number of locallylicensed, locally established and locallyregulated operators, even with a

broader base. Could we discuss this?

Sir Peter: Sir Peter confirmed that thereis consensus that Gibraltar will adhere toits model of restrictive, as opposed toopen, numbers based licensing. Hereiterated Mr Montegriffo’s earlier point,however, that the threats and challengescome not only from the difficulties inregulating effectively those high numbersof operators, but also from the difficultiesinvolved in regulating the now greaternumber of licensees that are notthemselves operators, but which provideservices to operators which blur the linesin the minds of the consumer. “In termsof the regulatory objective, which isconsumer protection and the protectionof the jurisdiction’s reputation, these arecapable of causing as much damage as if there was a problem with a gamingoperator. We must ask to what extentinternational public opinion is going todistinguish between Gibraltar’s link to an operator, Gibraltar’s link to an affiliateor marketer, and Gibraltar’s link to aregistration processor, for example.”

Sir Peter noted that the reviewcommittee was considering theestablishment of a licence separate to an operator’s licence which wouldlicense a whole series of supportservices activities to gambling operatorswhich themselves might challenge theregulatory objective.

Peter Montegriffo:Mr Montegriffoagreed, adding that this situation alsorepresents an opportunity in as much as Gibraltar’s reputation has attracted to Gibraltar’s shores a large number ofhighly skilled individuals, many of whomthen find it attractive to do businessbeyond the gaming space. Some,however, have found in the past thatGibraltar’s current licensing andregulatory environment is not conduciveto these activities. This review, therefore,represents an opportunity to embracethese ideas and allow individuals to dobusiness as they wish in a licensed and well regulated manner.

How do we intend to bring theregulatory toolbox up to date? Howand when might those tools be used?

Sir Peter: “This refers, again, to balance”,Sir Peter confirmed. “The theme of ourwork has always been an attempt toachieve equilibrium between thecommercial needs of the industry and

protecting regulatory objectives. Thisdiscussion is about the second of thosetwo, but will always take place againstthe context of a balancing act. The 2005Act, read together with and implementedside by side with the licenceagreements, have to some standardsprovided a light touch, but neverthelesshave also provided a completely effectiveform of regulation in the context of thelimited numbers that we wereadmitting.”

“But the world is changing”, Sir Petercontinued. “The industry is becomingmuch more multi-jurisdictional, multi-licence. In a sense, there are moreregulators, licensing authorities andforeign authorities looking at each-otherand expecting to find something incompanies’ interactions with their ownterritories. That view, really, is the driverfor the review of regulatory enforcementand regulator powers aspects of thisexercise. The 2005 Act and our licensingagreements gave us the first moveradvantage. We’re determined that in theregulatory space, too, we will keep thatprominent position and not allow it to bedegraded by the view that our currentregulation has no longer kept pace withthe changes happening in the world atlarge. A lot of the changes we’re thinkingof are there to make the system fairer,more balanced and more transparent forthe benefit of the operator with a moreincremental range of options forregulatory intervention. This will enablethe regulator to access information andassess financial status, thereby betterarming him to identify in advance andavoid problems, and allow for moremeasured, proportionate and effectiveterms of intervention.”

What is the right mechanism to moveus to where we need to be with regardto regulatory powers?

Peter Howitt: “The 2005 Act wasenabling legislation, and the switch now is to create an enabling regulatoryframework”, explained Mr Howitt. “Weneed to put more of the heavy lifting with the legislation, but in a moretransparent way so that the world cansee how Gibraltar does business, andhow it looks after stakeholders andconsumers.” Mr Howitt explained theintention is to make explicit theregulating authority’s role in achievingcertain goals, whilst also making explicit,on a principles basis, the correspondingrole of the licensee, thereby creating adovetailed, collaborative relationship of common objectives.

Could we reflect on the efficacy of theconsultation process?

Steven Caetano: “We must ensure that our door remains open if we’re torespond to an unpredictable and ever-changing industry. We’re trying to createas future-proof a piece of regulation aswe can. With a principles based approach,there’s leeway which enables us to adaptas the industry moves forward.”

Mr Caetano confirmed that, in terms of timing, the paper will be presented to the government before its summerrecess. The government will then consultwith the industry, a measure deemedabsolutely imperative, with the results of the consultation ready by the end of 2015.

Peter Montegriffo:Mr Montegriffoagreed, and expressed his desire tomake absolutely clear that part of theexercise is also to codify what theregulating authority already does. “This is not just new thinking. When we talkabout principles led regulation and so on,what we’re talking about is codifying away of doing things which has already

proved successful in Gibraltar, but whichwill allow greater visibility as to how that model works. Effectively, we wouldenvisage in due course that licenseeswould move away from the detailedagreements that currently exist becausethe requirements for those agreementswould be contained in codes or inguidelines that would effectively applyacross the board. So it’s just a codifyingof the existing practice and the existingcontractual arrangements that alllicensees sign up to on a pretty regular and standard basis.”

Question from the floor: Will this be a very expensive exercise?

Sir Peter: “We and the government are acutely aware of that issue”, Sir Peterassured the floor. “Part of the exercisewe’re undertaking when we mention ourdesire to ensure we remain relevant as ajurisdiction must include that we remaincompetitive. Of course, good things do come at a price and the Gibraltarproposition has always been that there is a deliverable, but we expectaccountability, regulatory footprint, weneed people on the ground, there areissues of technology, costs and duties as part of the review – that is all in the melting pot that we’re sure thegovernment will be discussing with the wider industry.”

Peter Howitt:Mr Howitt added hisopinion that the review is unlikely to have any significant cost implication forlicensees. “Really, what we’re doing hereis trying to make sure that the jurisdictionand our operators continue to be seen asthe best in the world. We’re trying to givea framework that shows that to theworld without unnecessary box ticking.We’re all saying it, we can believe it, and the financial figures and economicimpact speaks for itself.”

“Ours is a very human ledform of regulation, and wedon’t want to lose sight ofthat in this review”

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The "blockchain" database used byBitcoin is a technological marvel,but a commercial nightmare:unregulated, uncontrollable, andextremely punishing of mistakes. In this talk, Preston explains howimprovements in blockchain technow allow enterprise to cherry-pick the best parts for their ownpurposes while leaving the rest behind.

“By way of introduction; my name isPreston Byrne and I am the co-founderand COO of Eris Industries. What wedo is take the blockchain and we makeit usable in enterprise and othercontexts”, Mr Byrne began one of the eSummit’s most intriguing coffeebreak presentations. “Today, we’regoing to be talking about exactly what it is and what it means, whilst hopefully clearing up someambiguities. This is because Bitcoin is confusing a concept that reallyisn’t that confusing at all.”

“One thing I ask you all to keep in mind for the duration of thispresentation is ‘it’s just software’. I ask this because a lot of people have been talking for years about the blockchain and its use for things like land registration, keymanagement, identity records, thisand that. But, everybody is onlyactually using one blockchain, which is Bitcoin – the unregulated transfermechanism. Eris Industries thought‘why don’t we build something thatpeople can actually use?’, so that’swhat we did.”

“We did this because if you look at Bitcoin not as a currency, not as a commodity and not as a valuestorage mechanism, but as a piece of software; it becomes simply adistributed clearing and settlementssystem. If you submit a transactioninto that clearing and settlementssystem there is no clearing, it settlesin between five seconds and sixminutes and is also confirmed withinthat time. This is because of thecryptographic architecture that isutilised. We looked at that and realisedthat this was 99.98%, roughly twoorders of magnitude, faster as againstthe T+3 cash settlements system [T+3 translates to ‘trade date plusthree days’; the deadline for securitiescertificates to be issued to settle asecurities transaction]. What thismeans is the blockchain is a processautomisation, or process efficiency,tool which everybody has confused for a monetary transfer system.”

Mr Byrne explained that most peopleview the blockchain as a monolith; a big, globally distributed, resilient,highly powerful and indelible systemwhich serves a single purpose: “andwe’re all supposed to bow down andpretend it’s the best thing since slicedbread”. Eris Industries, however, actson the view that the blockchain is infact an open source means of creatingcountless variables on the blockchaindatabase model, each of which is ableto serve a different function and canbe repeated in context. “Very muchlike an assembly line; the differencebetween our approach and the current

Preston Byrne Co-founder & COO, Eris Industries

Blockchain 2.0

“Bitcoin is confusinga concept that really isn’t that

confusing at all, it’sjust software.”

Eris Industries is a blockchain technology start-upheadquartered in London. The company has launchedthe first, and to date only, open-source smart contractdeveloper platform to market. Preston is also a fellowof the Adam Smith Institute, where he advises on the intersection of law, economics and technology.Preston's work for the ASI encompasses a wide rangeof subjects including law, security policy, and capitalmarkets. Before founding Eris he was a securitisationlawyer with Norton Rose Fulbright LLP in London.

approach is that if it’s a repeatablepiece of data infrastructure that’s very cheap, you can start putting datato work for you, instead of you havingto work to manage it”, he added.

“And we’ve made it commerciallyrelevant. The problem with Bitcoin is it’s uncontrollable; all of your usersare unidentifiable, the value of thetokens itself, which is really just data,is extremely volatile. This is notsomething you get when you workwithin a normal database and in acorporate, or any other kind of contextyou need absolute control over whatthat system is going to do.”

“So, what we’ve done is said ‘right;what are the things that corporate,developers and governments need?’.First they need accountability; theyneed someone in charge in casesomething goes wrong. They needcontrollability; they need to be able tostep in, tailor that system and tell it todo anything. They need repeatability;they need to be able to repeat aprocess with absolutely no additionalinfrastructure. And they needreversibility; not in the sense of goingback and pulling things out of theblockchain – which you can’t do, that’sthe first law of the blockchain – buttelling all the users of that system that,if a particular transaction is fraudulentor needs to be reversed, they need to ignore it. That’s what we did.”

“What this means is the blockchainisn’t magical and it isn’t a moneymachine. It is a database, it is justsoftware. As a result, it will do exactlywhat you tell it to do; no more, no less and with a very high degree ofexactitude. So, as a consequence, it’s now possible to use blockchains in very specific contexts to realiseprocess efficiencies in organisationswithout needing a cryptocurrency inorder to do so.”

“To understand what this means, it’sworth understanding, quickly, the wayin which the Internet currently worksagainst the distributed Internet”, Mr Byrne explained. “At the moment,

every action a user takes is controlled from somewhere else and on a machine. A user inputsinformation on a web browser whileeverything else is produced by a faraway server cluster. By logging intoFacebook in Europe, a user is ‘talking’to servers in Ireland. Even a messagesent to a friend is done so via thoseservers. At no point are two userscommunicating directly, or peer-to-peer.”

“In a peer-to-peer framework, bycontrast, the machine in the middle is taken out and everybody startscommunicating with each other”, Mr Byrne continued. “The benefit of that is that if you’re using peer-to-peer computing we now have moreprocessing power and hard-drive spacethan we know what to do with. Mostof us have more processing power inour pocket than the entire world had in 1990. So, we try to come up withframeworks where people actually use that instead of lying fallow formost of the time.”

Mr Byrne described blockchains as “a pretty interesting peer-to-peerinfrastructure”. A blockchain is twothings, he explained, a database, orthe transaction history of a group ofusers using that particular blockchain.In addition, a blockchain is also aprotocol, or a series of rules whichgovern how that database functions.Another type of protocol, HTTP orHyper-text Transfer Protocol, governsuse of the World Wide Web, “but wedon’t put all of our data for all of ourwebsites on one server. Instead, wespread it out and agree the rules bywhich those databases are built tointeract with one another. A blockchainis very much the same.”

“Bitcoin is a database and a protocol.On the client side, there is animplementation to that protocol; aprogramme which reads that protocoland displays it on the user’s machinethrough the programme. A better wayof looking at it is a blockchain is adistributed rulebook which has atransaction history and which tracks

and secures the process of changingand updating that transaction history.Any write permissions to thatdatabase, say spending a Bitcoin, onany other database, say a blockchainbased social network, are secured bythe use of public key cryptography.”

“This means that if you know the rules – if you download the blockchain– you can know them and you canknow everyone who uses it, and youcan know everyone’s public keys. But, if you don’t have the right key, you can’t interact with this database in a way that you’re not allowed to. In addition to that, you can’t changethe database even if you’re inpossession of it. This is phenomenal.It’s like saying, ‘here’s a copy of theCompanies Act but you can’t change it just because you scratch out a bit on your copy’. So, it’s a very resilientframework for data-driven transactionsinstead of cryptocurrency.”

“So, what are the primary rules we have to keep in mind when weconsider what the blockchain is goingto do in the future? There are three of them, and you may have heardthese before: 1. Tell ‘em what you’regonna say. 2. Say it. 3. Tell ‘em whatyou said.”

Mr Byrne explained that the first rule,‘tell ‘em what you’re gonna say’, isknown as the transaction protocol.Effectively, these are the rules thatapply to the user. They dictate thepurpose of the blockchain, whatpeople do when communicating, who can broadcast transactions, their permissions when they do so and how they do so.

Rule two, ‘say it’, describes the networking protocol, whichdetermines how users communicatewith one another. It dictates what canbe said, to whom it can be said and in addition, how a user interprets what other people say to her. “Whatthe blockchain does is ensure thatevery transaction, every node, every computer using the systemprocesses every transaction sent on

“This isn’t cryptocurrency; it’s software development”

9

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“With the new SEPA [Single Euro Payments Area: an initiativepromoted by the EuropeanPayments Council to create a singlecommon cross-border paymentssystem] regulations coming intoplay, Gibraltar and the UK’s issuersare increasingly operating acrossEurope with the result that the twojurisdictions are quickly becomingregarded as centres of excellence for prepaid and emergingpayments”, Mr Johnstone began.“What we have here arerepresentatives from the cuttingedge of emerging payments and of some of the fastest growing and most innovative organisationsin the market. But first, I must ask:

In your view, what is an emergingpayment and when is it consideredemerged?”

Tony Craddock: “The difficulty withthis term ‘emerging payments’ is that, to some extent, it is boundless.Essentially, however, I think it has fourangles to it. There’s the angle oftechnology; such as the digital andvirtual execution of payments. Thenthere’s channels, such as mobile,online, peer-to-peer and possibly in-store or face-to-face in terms of valueexchange. The third angle, meanwhile,is emerging processes, or emergingways of doing things. One of thethings our trade body, the EmergingPayments Association, does, forexample, is it looks at the way in whichthe infrastructure of payments isenabling us to do things efficiently andwell. The fourth and final is emergingmarkets, which isn’t necessarilyrestricted to geographical terms butalso entails verticals. This is whygaming is such an important area for

us. It is absolutely an area whereemerging payments are beingdeployed brilliantly. It could also betransit; for example Uber is not a taxifirm, it’s a mobile payment firm with a little geo-location tech on top of it.Emerging payments have applicationsanywhere. A seed of an idea can growto become a flower or a redwood tree.I think it’s considered to be ‘emerged’rather than ‘emerging’ when itbecomes boring.”

Would you say pre-paid is‘emerging’ still?

Tony Craddock:Mr Craddockexplained that pre-paid gift voucherscould rightly be considered emerged,whereas a number of pre-paideWallets are still in the process ofestablishing themselves in the market.“So prepaid is still firmly in the

Panel Session: Emerging Payments Moderated by:

Andrew Johnstone,

Director Prepaid Business Development, MasterCard

Panellists

Kriya Patel, Managing Director, The Bancorp

Tony Craddock, Director General, Emerging Payments Association

Tom Cregan, Chief Executive, Emerchants

Miles Paschini, Group President, Wave Crest Group“The blockchain is a processautomisation, or process efficiency, tool which everybody has confused for a monetary transfer system.”

11

the system. Everyone agrees the stateof all of the data in the entire world onan ongoing basis. With Bitcoin this isevery six minutes and if someone ifJapan sends some Bitcoin to someonein South Africa, I can see that from theUnited States. But, knowing that doesnot allow me to interfere with it.”

“Finally, there’s ‘tell ‘em what you said’ which in my view is the mostimportant principle. We call this theconsensus protocol. This confirmswhat has been said, who said it, andwhether the record is correct. Thelatter is most important because thething about Bitcoin is what happens inthe past determines what can happenin the future. If I’ve spent all myBitcoins I can’t do it again. If I try to doit again, the system will reject it. For acorporate this is interesting becauseyou don’t need to supervise thesystem. You know that when a userfinally disperses all of their funds froman account they’re not going to be ableto double spend. So, you’re putting thetransaction history to work for you bycreating a predictable frameworkwhere the data is actually regulatingitself. You take all these rules, put theminto a rulebook and translate thatrulebook into something we canunderstand, like a Bitcoin wallet.”

“The reason people think Bitcoin and the others are so special, if welook at it in this three rule framework,is that it’s first open to all and evadesgovernment controls. Secondly, it is resilient to interference anddestruction because it’s spread around the world and, thirdly, it relieson competitive mining, which meansyou have to throw a lot of computerpower in order to get a new block oftransactions in the chain – but youdon’t have to.”

“Bitcoin doesn’t solve any particularproblem very well. However, if youlook at the blockchain as a datastructure that can do anything you tellit to do; you can engineer very specificsolutions to very specific problems.

This means you can cherry pick thethings you like about Bitcoin whileleaving behind the things you don’t.That mostly means assuming controlover the database, allowing for a newattack vector (in from the top), but italso means that you don’t have tosupervise what your users are doingwith it and you don’t have to managethe data quite so much.”

“The question is, of course, why doyou care? Well, for a lot of things youprobably don’t, to be brutally honest.Anything a blockchain can do, a servercan do. If you’re perfectly happy withthe things your servers do, then keepon doing it. If, however, you have somecoordination or security problemswhich you think a blockchain might beable to solve, then that’s somethingyou might want to consider. So, ifyou’re coordinating multiple softwarestacks, acquiring other organisationsand translating data into a uniformframework for global reporting, youmight want to use the blockchain.If you want to simplify multipleprocesses into a single process, orwant to get human beings out of theequation, this is something you want a blockchain for. If timely verification is paramount, a blockchain can beprogrammed to verify very, veryquickly as against a human verifiedprocess. And if you want to reduceyour supervision or oversight costs it’s also very useful.”

“But, what are the things thatblockchains are bad at? Well, if itrequires speed – if the speed of light is your enemy, like in high frequencytrading – the answer is a very firm no. This is not something to getinformation out quickly; it’s to try to getit out verifiably. If it requires very heavycomputation then no; blockchains arepassive, they are permissions andauthentications databases. Theycontrol what people do and therelationships between people; they arenot designed to pipe information out tothem. They constrain them, and in avery transparent way. And for things

that are automatic anyway, a paymentssystem for example, then the answeris, again, no. I get a lot of flak for thisopinion, but I don’t think the blockchainis good for payments. Paymentssystems are very low latency, veryhigh volume, and they’re almostentirely automatic. Charge backs areone piece of the equation, but seventransactions per second means it’s notvery good as a global payments orsettlements system. You can, however,drop in a blockchain to confirm thetransactions are accurate.”

“So, we know how a cryptocurrencyworks, what about any other kind ofblockchain? Well, we can change thatas well, just by going back andswapping the rules. If you have acorporate chain, you might say it mustbe controllable in every respect. Allwrite permissions must be accessiblethrough public private key encryptionand cannot be open to the public andyou can have an administrator key tochange permissions on command. You also want to distribute the logic sothat the system can’t be flooded withpackets, attacked or destroyed. Finally,you might want to change any aspectof the system on command, but theway you do it must be very transparentbecause you can’t take data out of the past or change it. This meets allcommercial standards of data securityand certainty. Finally, no mining.Mining is an incentivisation model or feature of the database, it is nolonger necessary.”

“Once you’ve designed your system,you come to Eris Industries, write your rulebook, roll out the chain anddeploy your decentralised app. Onceyou’ve done that, you do it again, and again and again, because this isn’t cryptocurrency; it’s softwaredevelopment. Blockchains are notmoney machines; they’re justdatabases which can do some reallyinteresting stuff. Now you can createas many as you want and you don’thave to pay anyone a penny to do so.”

Andrew Johnstone

Andrew Johnstone has been with MasterCard for 7-years and is currently Director,Prepaid Relationship Management and Business Development in the UK & Ireland,working across the value chain with distributors, programme managers, processors,issuers and consultants.

Andrew started his career at HFC Bank in 1995 and held a number of sales,marketing & database marketing management roles. Andrew then took responsibilityfor European consumer finance marketing in HSBC’s European operations,developing marketing strategy and leading teams in 5 emerging markets, covering 6 business channels as well as providing consumer finance consultancy in otherglobal markets. After HSBC, Andrew spent a year at a venture-capital funded start-uplending company, supporting and developing the UK network roll-out, marketingstrategy and communications. Andrew has over 20-years’ financial servicesexperience and a geography degree from Royal Holloway, University of London.

emerging payments area. It has been so, to some extent, for the past 20 years.”

Kriya Patel: “To put that into context”,Mr Patel added, “as part of the widergroup, The Bancorp issued over 70million cards last year in the US alone,the majority of which were prepaid,with some debit. That doesn’tnecessarily mean, however, thatprepaid is emerged. Just becausesomething is established, doesn’tmean you cannot evolve that systemto work in different ways. There’salways a need to find new ways ofdoing things, but utilising tried andtested infrastructures.”

Miles Paschini: “I take a slightlydifferent view of it. I think prepaid isjust an extension of credit and debit,and if you look at the volume ofprepaid in dollar volume around theworld it certainly, in my view, hasemerged. I think the exciting thing inprepaid at the moment is application.Certainly in the early days prepaidmeant a gift card but we’re now seeing applications that people don’teven realise.” Mr Paschini used theexample of airline ticket purchasing onan aggregator website, explaining thatthe aggregator is likely using prepaidsystems as a means of settlingpayments with the airline. “These are emerging uses for an emergedtechnology.”

Tom Cregan: “We have a term in our company which we call a‘legitimacy gap’ when we look atdifferent emerging payment types”,Mr Cregan added. “In the US pre-paidis now commonplace, but in Australiawe’re talking to customers who reallyhave had very little exposure to it and therefore see it as somewhatillegitimate. It takes time and energy,and a lot of hard work, to propagateprogrammes in the market. The moreprogrammes, the more peoplebecome familiar with it, the less

illegitimate it seems. Crypto-currenciesare facing the same thing today, butover time it will become legitimate. So, I think a payment system becomesemerged when the customer on thestreet understands what it is. Whenthere’s no legitimacy gap, you canconsider it to have emerged.”

What do you think is stoppingtraditional players embracingemerging payments?

Tom Cregan: “I think there’s a wholeraft of factors affecting their decision”,Mr Cregan offered, “traditionalthinking, risk aversion, establishedbusiness models. I also think they’renot by nature innovative companies.The companies that invented prepaid,for example, were not banks; theywere entrepreneurial outfits riskingtheir own capital. Only when they hadbuilt great businesses did the banksenter the space and work with them.”

Tony Craddock:Mr Craddock agreed,adding his opinion that the situation is a little difficult. “An elephant is an elephant, it has no choice. Thesmart elephants are the ones whounderstand that rather than trying to innovate themselves, it’s better to support other, more agileorganisations. MasterCard, forexample, supports the EmergingPayments Association’s incubator forearly stage payments companies inLondon. This incubator works as acatalyst, so that’s what we’ve called it –the Catalyst. MasterCard acts asa Benefactor of the Catalyst andsupports companies trying to innovate.”

“In fact, I’m delighted to announce that,as of today, The Bancorp is also goingto be a benefactor of the Catalyst. It’simportant to take inspiration from theentrepreneurial, smaller companieswhich are more risk friendly, maybeare in touch with the vertical they’reworking in and want to get access tothe best of breed in payments. For the

big companies it’s difficult, but that’snot to say they can’t contribute likeMasterCard and The Bancorp.”

Miles Paschini: Mr Paschini added hisopinion that there are two barriers toinnovation that companies need toembrace. The first, he explained, isthat many companies are unaware ofthe options available to them todayand which could improve theirbusiness. Brand and reputation alsoplay a critical role. Drawing uponBitcoin as an example, Mr Paschinisubmitted that many understand its benefits but that a lack ofunderstanding of risk and perceptionmeans they’re reluctant to engagewith the technology.

Kriya Patel: “There are banks, building societies and other financialinstitutions that could take this step,but I think where they struggle,historically, is in education and the fact that they will take so much longerto make those decisions,” Mr Pateladded. “As a result, we as an industryhave taken ownership of innovation.We facilitate solutions for people whoare innovating and finding new ways to manage payments. We have theopportunity to be responsive, moreagile. But the focus is still the same,we’re a risk based organisation; webalance the opportunity against therisk associated with taking somethingnew to market, whether that’sreputational risk or financial. But for a proof of concept to be a success, it needs somebody to support it.”

He continued: “Often, the companiesthat come up with the greatest ideasfor utilising traditional infrastructurebased payments are really pushing the boundaries, but where they need support is from the guys whounderstand the regulation, thecompliance, understand how to dealwith payment network rules. That’s theimportant part that we play. Industrybodies play an incredibly important

part in the education piece, and we asan industry have to be a part of that.”

Tony Craddock: “Absolutely”, Mr Craddock agreed. “The regulator isalways happy to promote responsibleinnovation, although this is one of thethings that varies a lot according towhere you are in the world. Theregulator for payment systems in the UK is, I think, highly enlightenedand progressive, and what they’repromoting is innovation. If that’s thecase, we then come along to educate them.”

What do you think is slowing theemergence of new payment types?What can be done to remove thebarriers?

Tom Cregan: “Part of it is on theproduct level. I would love to claim this as original thought, but I recentlylearned that over the past 10-years the US has been home to over 400emerging payment companies thathave gone broke. They failed becauseunless these companies can becomedemonstrably superior, people won’tchange their habits because paymentsis a largely inert business and peoplewill continue to do the same thing.They’re not after incremental gain;they’re looking for systemic gain. Oncea company has created a demonstrablysuperior technology, however, theones that are successful are thosewho then ask ‘can it be scaled?’ andmarry it to a company which alreadyhas scale. A lot of emergingcompanies die because they don’thave the right strategy.”

Tony Craddock: “I also think a little bit of fear stops innovation. It’s not alack of creativity and there’s no lack of technological solutions out there.It’s really about the companies goingout to the different verticals andsaying ‘we have some great solutions to solve your problems for you’.”

Miles Paschini:Mr Paschini addedthat, from the perspective of WaveCrest Group, the greatest hindrance isvarying regulation in different parts ofthe world. “We look at opportunitiesalmost every day which are truly crossborder. If we work in a regulatedenvironment in the US and one inEurope, I can assure you they’re notharmonised. This is a big barrier. Theworld is globalising; the idea of movingmoney around the world inmilliseconds exists, the technology isthere. The idea of a harmonious anti-money laundering, anti-fraud, knowyour customer environment does not.For us, this is a big barrier. You have tolook at opportunities that only fit withinthe multiple regulatory environmentsthat we work in.”

Tony Craddock: “Unfortunately, I thinkthat’s a given”, Mr Craddock added.“The Emerging Payments Associationlooked at what it would take toharmonise regulation, thinking thatsurely there is ‘best practice’regulation out there. But there is avested interest amongst the legislativeand regulatory industry in maintainingthe status quo. Just imagine if, ratherthan the 295 different jurisdictions, onefor each country, we had one effectiveregulatory jurisdiction. How manylawyers would we need then? Mypoint is, we have to work with thislegal complexity. We do want to seesomething more harmonious across boundaries.”

Do you think that commercialpartners and their users actuallytrust emerging payments?

Kriya Patel:Mr Patel believed so,adding that ultimately the questiongoes back to why innovation existswithin the space to begin with.“Innovation is driven by change;whether that’s consumers looking for convenience, or companies forsecurity. As Tony touched on earlier,everybody makes payments every day;

13 14

“The idea of moving money around the world in milliseconds exists, the technology is there.”

“Uber is not a taxifirm, it’s a mobile

payment firm.”

Kriya Patel

15 16

you don’t think about it, you just do it.That piece is the most important thingfor businesses and partners; helpingthem to understand the efficienciesthey can gain, the solutions we cansupport and helping them tounderstand that it’s within a stableinfrastructure and is compliant. Often a single solution can involve six orseven different products, but from aconsumer point of view, it’s one. That’swhy emerging payments are going tocontinue to grow and are ultimatelydriven by consumer demand. I’ve seen so many payments innovations in the past ten years driven by gaming alone.”

Do emerging payments matter?

Miles Paschini: “We’re solvingproblems for businesses andgovernments”, Mr Paschini affirmed. “I think there’s a definite need incorporations to increase efficiencies,lower costs, automate processes andemerging payments can certainly beapplied to these areas. Really it’s aboutsolving problems. The buyers that wesee today are people who are lookingto do things better. If you’re used toeffecting a payment over three of fourdays, and I can use a method to effectthe same in three seconds, that’s a big improvement.”

Tony Craddock: “I think it doesmatter, and I believe so because if you get to the point where you’redelivering all the right technologies,through the right channels, in the rightmarket places then ultimately you’rereducing cost and taking time out, and adding in opportunity for bothcommerce and revenue. In a worldwith 7 billion people in it, of which amassive bulk are unbanked and under-banked but do have access to thesetechnologies, then the more efficientwe can be the more likely we are to go out and touch these people, andimprove lives everywhere. And theability of emerging payments toimprove lives everywhere is whyemerging payments matters.”

How can we make the end customer more aware of thepotential benefits?

Tom Cregan:Mr Cregan explainedthat from his company’s ownexperiences in Australia of late, the problems that the gamblingindustry has been trying to solve aremore related to revenue than cost. He explained that working withcompanies with scale – those that are highly profitable, well run andwidely recognised – ensures that the consumer adoption curve of anemerging payment option is rapid. Mr Cregan added, however, that thismust be within the context of a widerproduct promotion and that a paymenttool is, by itself, unlikely to generatewidespread consumer interest. Onlyby sharing space with product focusedpromotions is a payment tool likely to see increased and effectiveconsumer adoption.

Miles Paschini: “I think a lot of it isknowing your audience”, Mr Paschiniadded, “because the small, innovativepayments companies cannot competewith Google and Apple – they havebudgets beyond imagination. To givean example, Tom and I compete in thetaxi driver payments space, and theyhave a problem. The fleet operator has a problem about how frequentlythey pay their drivers, who are oftenunder-banked migrant workers. In thiscase, it is they who will come to us,and we will respond with a solution to their problem. We earn the trust ofthe end consumer because we takethe time to work with them and fixtheir business’ payments infrastructurewith a niche product. We’ll both solve a real problem for them bylistening to them.”

Are the distributors putting theappropriate budget behind theseproducts?

Kriya Patel: “That’s part of thedecision making when we look atpartnerships”, said Mr Patel. “This is an investment – you can’t do things for free. We’re all in this as a businessto make money, so the business plans have got to stack up, and thatinvestment can be made in manydifferent ways. To market a newproduct to a consumer is incrediblyexpensive – so what we try to do is

talk to the businesses that have these customers. If you educate the businesses, they can take thatdownstream with their budgets. But it has to solve a problem.”

“We’ve seen particular success storiesthrough distribution in Europe and the US”, he continued. “In Europe, we ran an incentive programme forBridgestone Tires over 20 countries.Some of those countries were new to prepaid cards, but we thought ‘OK,we have a really trusted, internationalbrand here with physical locations, so the accessibility’s there. They’realso giving something back to theconsumer and they’re gainingexperience with a payment productthey’ve never had access to before’.That was interesting to me becauseBridgestone had the distribution, theywere prepared to put their marketingdollars behind that, and they weregiving me the ability to get in to amarket, educate and help users toadopt the product, then expand that by reaching businesses we knowwould benefit from solutions we can provide.”

What are the next big opportunitymarkets?

Tony Craddock: “My understanding is that Asia is really exciting and Africais really exciting. I don’t think muchcreativity and innovation in applicationis coming from the developed world. I think a lot of the most useful ideascan be transposed from the developingworld to the developed.”

Tom Cregan: “In those markets thatlack financial infrastructure, mobilepayments have really taken on adifferent dynamic. MasterCard, forexample, is running identity cards with payment capabilities for up to 40 million people, which is landscapechanging. We’re also seeing a lot ofinnovation in Asia. Some we know are never going to launch – like anRFID chip you can wear on your shirt.But nonetheless, that’s one of thethings we love about the industry, it’s never short of innovation.”

“That’s one of the things we love about the industry, it’s never short of innovation.”

1817

“There are different definitions andapplications of the concept of socialresponsibility”, Mr Howitt introducedone of the eSummit’s most anticipatedpresentations. “I’ve read that it’sreally about corporate citizenship,which is certainly not a bad place to start and leads to an interestingdynamic in a capitalist environment.In an economy with companieslargely structured for the benefit of shareholders, where citizenship is not usually part of a gamblingcompany’s constitution, it’s notnormally part of their legal require-ments to shareholders, and it’s oftennot what they’ve been set up for;

Why should companies care aboutsocial responsibility?”

Gilbert Licudi QC: “It is true thatcompanies can look at this in isolation;purely from the point of view of thecompany, purely in terms of what youoffer the customers or making profits”,

Minister Licudi began. “But being inbusiness is much more than that. Ithink everybody realises it’s not justabout looking at the bottom line. Andeverybody recognises that there is anelement of social responsibility. It’s notjust for us as politicians to set theagenda for social responsibility. It’s theindustry itself that often takes the lead.”

Minister Licudi referred to the earlydays of Gibraltar’s gaming industry,which was unregulated at the time. As operators began to move to thejurisdiction, he explained, the move for regulation to ensure that certainstandards of social responsibility were enacted which maintainedGibraltar’s high reputation came fromthe industry. “It wasn’t initiated bygovernment, it wasn’t initiated bypoliticians, it was the industry thatrecognised that this was somethingthat needed to happen.”

Following a push from the industry

which set those standards, Gibraltar’sGambling Act was enacted and,subsequently, its regulator Phill Brearappointed. “I think we’ve moved onprecisely because of that recognitionthat we’re all on the same boat, we all want the same thing for Gibraltar.We want Gibraltar to be held in highesteem and we want Gibraltar to berecognised as a jurisdiction that people want to come to and engagewith. That’s good for business and the jurisdiction.”

Wanda Goldwag: “Companies shouldcare because we don’t live in isolation;we don’t live in a world where I cantake money from you and perhapspeople who are quite vulnerablewithout being held to account – that’swhy social responsibility matters”, saidMs Goldwag. “It doesn’t matter if it’sthe gambling industry or financialservices, or clothing retail, we all thesedays are in a world in which somethingwe do can be commented on Twitter,

and suddenly one hundred millionpeople know about it.”

Ms Goldwag continued in explainingthat as well as being the right thing todo, corporate social responsibility istoday also a commercial imperative.“When we trade, when we act, whenwe do deals, we do so in a way that’scompletely transparent. We’ve movedfrom a world where people didn’tknow about disasters and irregularitiesto a world in which everybody knowsreally quickly. We’re not in a Watergateworld now; we don’t need journaliststo investigate. We’re in a Twitter worldwhere a disgruntled employee can goon social media and say ‘this companyis terrible, do not deal with them’ andhundreds of thousands will respond.So, it’s morally right, but also afinancial necessity.”

Do you think online industries havea particular problem because oftheir remote nature?

Steve Donoughue: “My view is the online industry suffers politicallyfrom the view that you’re all ‘evilscumbags’”, Mr Donoughue warned.“They see you as not paying any taxand that you’re picking the pockets of your customers. What socialresponsibility is about is whetheryou’re a good guy or a bad guy. Socialresponsibility is looking after yourstakeholders, not just your

shareholders. Your stakeholders areyour customers, your staff, thecommunity you work in.”

“You have politicians out there whoknow very little about your industry.But what they do is put you in thecategory of good or bad, very easily. Atthe moment, the gambling industry isvery definitely in the bad guy category.By becoming good guys, you getthought of as such by politicians andthey give you a fair hearing. What I sayto people is look at Wonga. They’vejust published losses of £135 million.They basically got slapped by thegovernment because the governmentsaid they’re bad guys. They’re bad guysbecause, as Wanda said, there was awhole social media campaign, whichwas led by MP Stella Creasy, and thepublic view went against them. Whenthe public view is against you, it’s veryeasy for politicians to slap you. This iswhat social responsibility means foryour industry. It not only makes youdecent people, it also means youwon’t get damaged, and there are agreat many things out there thatgovernments can do to damage you.”

“You are very fortunate here inGibraltar. I’ve been very surprisedtoday at the amount of governmentsupport, the degree of engagementwith the ministers and the ministers’pledges to consult with the industry.But that simply does not exist in

governments like the UK’s, and that’s dangerous.”

Wanda Goldwag: “It’s not just to do with the letter of the law and howthat influences perception. These arethe same principles applied to anyindustry”, Ms Goldwag added. “Ifsomeone says to you ‘what’s bestpractice in the music industry? What’sbest practice in the aviation industry?’,I can tell you the answer to that. Ifsomeone in financial services asks‘what do you think about the Wongamodel?’ – the answer would be‘bloody hell, they’re insane!’.

Ms Goldwag continued: “One of theproblems in our industry is we rewardour staff for a great marketing idea,thinking ‘this is going to make us a lotof money’. What they don’t seem toask is ‘what will be the consequencesof that? What will other people thinkabout that?’. One of the things aboutsocial responsibility is it’s not about out there; it’s also about what yourown business does. When an ideapops up there ought to be a momentwhen someone who was not involvedin that process says ‘yes, that willgenerate some short term profits, butin the long term our company will beclosed down’.

Steve Donoughue: Mr Donoughuereferred to the example of PaddyPower’s now infamous campaign

Panel Session:Social Responsibility in Gaming

“It’s not just for us aspoliticians to set theagenda for socialresponsibility. It’s theindustry itself thatoften takes the lead.”

Moderated by:

Peter Howitt, Founder/Director, Ramparts

Peter has worked for over 10 years in the e-commerce and financial services sectorsas a lawyer and corporate advisor in England & Gibraltar, and he is dual-qualified inEngland & Gibraltar. Peter also has personal experience of establishing an onlinesocial network for artists. He is currently the CEO of the Gibraltar gaming industryassociation the Gibraltar Betting and Gaming Association (www.gbga.gi) andSecretary of the Gibraltar E-money Association (www.gema.gi).

Panellists:

Wanda Goldwag, Chair and Independent Standards Commissioner, Senet Group

Stephen Donoughue, Gambling Consultant, www.gamblingconsultant.co.uk Limited

Martina King, CEO, Featurespace

Gilbert Licudi QC, Minister for Education, Justice and International Exchange of Information, Gibraltar Government

Peter Howitt

2019

which allowed the public to bet on the results of the Oscar Pistorius trialunder the title ‘money back if hewalks’: “What that did was send aripple right through to Westminster”,he remarked. “Most of the peoplewho had never even heard of PaddyPower now think they’re bad guys.There were questions in the House [ofCommons] and it was all just for thewant of a couple of extra quid througha marketing campaign. Their reputationhas slumped, but it’s not just PaddyPower’s because these politiciansdon’t know Paddy Power from WilliamHill; it’s the whole industry. It’s thatshort term goal which sometimes ruins reputations.”

Martina King: “It’s important toexpress that internal voice”, Ms Kingadded, drawing from her experience as Managing Director for Europe at Yahoo!. “Corporations andorganisations can get on a roll andforget to stop and review. For example,the laws of pornography are verydifferent in California compared to theUK, making advertised content verydifficult to filter. The pressure groupsattacked the internet and searchengines as a whole, which of coursedidn’t even know what sort of contentthey were hosting. As soon as thatwhole Pandora ’s Box opened theinternet did exactly the same as thegaming industry and worked toaddress it. The consumer was quiteright, there was some distressingcontent being advertised out there, butthe response was the search engineswere only hosting it and didn’t publishthe content itself. As soon as they got into that semantic argument it got confused. The consumer saw onething, while the companies whosebrands were being associated with thisadvertised content put forward thecommercial argument. They asked thequestion: ‘if your source of revenuecomes from advertisers, and youradvertisers are publishing questionablecontent, what impact is that having on

your business?’. The search enginesultimately had to go and proactivelysort that problem out, because it wasthe right thing to do for the consumerand the business.”

Gilbert Licudi: Picking up on the topicof reputation, Minister Licudi addedthat the issue is particularly pertinentto a jurisdiction such as Gibraltar.“We’re a small jurisdiction. In a largejurisdiction, a large scandal will clearlycause some ripples. It will cause someproblems for that company, but it’svery difficult to see that the wholejurisdiction will be affected in a trulydevastating way. The position inGibraltar is very different. If we had a very big scandal with a domesticcompany, that would be very bad forthe jurisdiction as a whole. That’s whyit’s so important that we do things theway we do here. Mr Donoughueexpressed his surprise about the waywe consult the industry and operatehere, but it has to be like that, it’salways been like that. It’s true of all ourindustries where we develop thesesocial partnerships. The emphasis hasto be on maintaining standards and a high reputation and we do that by becoming home to the bestcompanies in the world, which adhereto the best standards in the world.”

Has the industry done a good job indealing with sensitivities aroundadvertising?

Wanda Goldwag: “The short answeris no they haven’t. As soon ascompanies were allowed to advertisethey were like kids at Christmas.Marketing ideas need to have somelongevity and I think what happenedwas a whole series of companies whohadn’t been able to advertise on TVand didn’t have experience weresuddenly able to. The result, it has tobe said, was that some of the advertswere unbelievably crude, unbelievablybasic and without context. Theproblem was the ads were all

shouting ‘free bets! Free bets!’, and the consumer who wasn’t used toseeing this suddenly thought gamblingwas all over the place, and a problem.It’s something that people aren’t usedto and isn’t completely sociallyacceptable. Those ads are also highlytargeted around sports – football,cricket, boxing and so on – so it’s even more concentrated and perceived as such.”

She continued in remarking upon thedifficulty of regulating advertisingcontent itself. In a commercial world,she explained, companies need tomarket to customers. However, TVadvertising is only one tool of many,but one which companies have beenso enthused about they haveneglected other media. Moreover, atthe same time as gambling advertisinggrew, so too did pay-day loanadvertising, “the put your hand up andget £5,000 advertising”. As a result ofthis exposure to aggressive advertisingfor two industries with negativeconnotations, consumers are drawingconnections between the two andwith damaging results.

Steve Donoughue: “Look at everyspeech where politicians mentionedgambling in the same sentence as payday loan companies”, Mr Donoughue advised. “These arethe people who are categorising. If you look at the history of gambling,every time it becomes too prominent –in the 1920s it was football pools, in the 1960s it was bingo, it wasmachines in the 1980s – action is taken.”

“I deal with a lot of politicians. Someof them are from the nineteenthcentury and most of them still thinktelevision is a modern piece ofequipment. This is something they pickup on, and it’s not positive. But quitefrankly this is just about content andthe way you do your advertising, whichis something you can change.”

“Social responsibility is looking afteryour stakeholders, not just yourshareholders. Your stakeholders are yourcustomers, your staff, the communityyou work in.”

“Before you press the button, just thinkabout how this will play in terms of socialresponsibility and how this will affect theindustry as a whole.”

2221

How well do you think the gamblingindustry manages perception?

Martina King: “The differencebetween perception and reality isimportant here. In my working career,I’ve never seen an industry cometogether and share data as well as you have in order to proactively try to solve a problem such as problemgambling – and you really do need to be applauded for that. The recentconcern over the banning of fixed odds betting terminals (FOBTs), forexample, is something to worry aboutand taking control, giving a differentstory to educate the government andthe pressure groups, is definitely theright thing to do. More work like that is exactly what will start to swing opinions.”

Gilbert Licudi:Minister Licudi posedwhat he termed the relevant questionof why this negative perception existsin the first place, to which he proposedthe answer: “people think you justdon’t care. This brings in the issue ofresponsible gambling. If it is shownthat this is an industry that doesrecognise when problems arise, thatdoes put in place systems and trainingto identify the causes of irresponsiblegambling, the effect that has onpeople’s lives and on gambling itself,then progress will be made. We thenneed to show that these mechanismsare being put to use; that identificationis progressing, that self-exclusionprogrammes are available and thatongoing support is offered. All of thosethings are clearly being done. A lot ofeffort and a lot of money goes into theproblem, but it needs to be seen bythose outside of the industry. We needto be perceived as being responsibleand acting properly when a problem is identified.”

Wanda Goldwag: “I do think we need to be careful about differenttypes of gambling being demonised. At different points in history, different

types of gambling have beensensitised and become of concern. I’mwilling to guarantee that if somethinghappens around FOBTs in the UnitedKingdom, for example, politicians andpressure groups will then simply moveon to the next thing. That’s why thegambling industry as a whole has tobe responsible. At the moment theentire gambling industry is beingrepresented by those machines. If those machines ceased to existtomorrow morning, the entiregambling industry would berepresented by something else. It’s very easy for us as sociallyresponsible people inside the industryto say ‘solve this little practicalproblem with this specific type ofgambling and it will go away’. But the public and politicians don’t see it like that.”

Steve Donoughue: “I’m going to give you some socio-cultural history,because I know that’s what you’vebeen waiting for. Basically ,we’ve beenthrough a financial crash which wascaused by bankers and we’re allsuffering because of these evil, nastypeople. As a result, there are a lot ofpeople who are rejecting a certain set of cultural values held in previousyears. This is the way history is; we go through a period and then we reject it. What we had in the 90s was a modified form of the 80s – freemarket values, not a lot of morals.We’ve now gone through that and are about morals in markets. And so, what you have is gambling beingconsidered a raw, immoral market by a lot of people.”

“What you also have is a class clash”,he continued; “because gamblingtraditionally has been a working classactivity. Online is different, I know, but land-based is traditionally workingclass. That’s why is has been easy toattack FOBTs for being in areas ofpoverty etc. The fact is, betting shopshave always been in poorer areas

because that’s where the customersare. But you are dealing with decisionmakers who are white, upper middleclass, who have never been in abetting shop and who have probablynever gambled. It’s never botheredthem because they’ve not had to careabout it. Now it’s coming into view,and from their perspective it’s abouthelping people. I know we’re anti-politician, but they’re mostly very nicepeople who want to serve and helpothers. For them, rather than look atthe facts and the evidence, it’s a loteasier just to ban it or tax it. If I was Ed Miliband, looking at how to dealwith FOBTs, I couldn’t ban themoutright because that’s £1.7 billion intax gone. But I’ve got this online thingwith a new licensing regime. I know at some point there’s going to be ascandal – so the easiest thing again, is to just raise all your taxes. Why?Because that’s simple and no onecares. No one cares if you guys go out of work.”

“So, to fight back, how about someadverts from you guys showing youtraining for social responsibility? Howabout a few adverts showing what you do in your community? Take themessage that you’re providing a goodservice and give it to the people.People want to gamble: show thatyou’re providing well regulated, fun gambling.”

What should we be doing together?

Gilbert Licudi: Providing a specificexample of something the GibraltarGovernment will be doing as ofSeptember 2015, Minister Licudioffered Gibraltar’s first university, TheUniversity of Gibraltar, as an excitingand pragmatic response to the needsof the gambling industry, amongstothers. “There are a number of thingswe will be doing specifically inresponse to responsible gamblingbecause it’s important that Gibraltar as a jurisdiction, rather than just its

operators, foster this ethos. We will be offering post-graduate courseson the causes and effects of problemgambling, leading to a PHD. This willgive us the data and the expertise. We will also offer a series of shortcourses aimed at all industryemployees and developed with the industry and its regulatoryauthorities. So there are a number of things we are doing as agovernment, in partnership with the industry, to promote responsiblegambling and make sure Gibraltar is seen in that light.”

Wanda Goldwag: “Though I’minclined to say join the Senet Group, if I was to be absolutely neutral Iwould say to the senior managers‘when someone comes to you with a wonderful marketing idea that isgoing to bring you millions; before you press the button, just think abouthow this will play in terms of socialresponsibility and how this will affectthe industry as a whole’. If the answeris it’ll make you a quick buck for thenext couple of quarters but afterwardsbe disastrous for the industry as awhole, don’t do it.”

Steve Donoughue: “I would like tosee every CEO of every gamblingcompany personally take £200,000 out of their pocket, put it in a big pileand spend it on a home for puppies. Or something similar. You’re here andyou’re trying to be there. It’s no gooddoing it incrementally because ofregulatory creep working in theopposite direction. Each new regulator,each new jurisdiction, each newacademic, just makes the argumenttougher and more obscure. What youneed to do is make a massive leap. We have some very rich people in this business. They should be on film,handing over money and saying ‘let’sdo good with this’. The change thatwould make in perception, and in the lives of some puppies, would be massive.”

Martina King: “People love betting,and I’d bet they’re going to continuebetting. Most people who are bettingare happy and for those who aren’t,you have started to ask the questionsand address the problem. There is noeasy answer to problem gambling sokeep asking those difficult questionsand keep working on the answers.Most importantly, do it together. If we keep working together, we will find the answers.”

“I’ve never seen anindustry come

together and sharedata as well as you

have in order toproactively try to solve

a problem such asproblem gambling.”

“There are a numberof things we are doingas a government, inpartnership with theindustry, to promoteresponsible gamblingand make sureGibraltar is seen in that light.”

Wanda Goldwag

Martina King

2423

In one of the day’s most well received and pertinentpresentations, Mr Stocks introduced‘Red Carnations and SlayingDragons’ as an analysis of thebloomings of opportunity formergers and acquisitions behaviour in the gaming market,and an identification of thosecompanies which will, perhaps, not make the cut.

Mr Stocks then drew the attention of the audience to a statement issuedby Deutsche Bank in February 2015,which read as follows: “Our viewremains that the European onlinegaming sector will consolidate in the near term as falling industrygrowth rates in the UK/Europe, risingmarketing costs, increased gamingtaxes and rising competition makescale an increasing necessity tocompete more effectively.” He statedhis intention to analyse whether thisstatement is likely to become true in the near future, as well as todetermine whether M&A activity wastruly reflective of consolidation in thesector or simply the ‘backgroundnoise’ expected of any industry.

“The first question to ask is ‘isconsolidation actually happening?’”, Mr Stocks continued. Referring to a ‘deal timeline’ depicting M&Abehaviour and scale, by company, fromJanuary 2013 to March 2015, he notedthat activity has increased in terms of

value by a significant margin. WMSIndustries’ £896m merger withScientific Games in October 2013represented the biggest of that year,alongside William Hill’s purchase ofSporting Bet Australia and SinoCement’s purchase of Macau LiveGaming. 2014, however, saw GTECHHoldings’ buyout of equipmentmanufacturer IGT for £3.591 billion,the largest of the year, followed byScientific Games’ buyout of BallyTechnologies (£3.041 billion), Amaya’ssurprise buyout of Rational Group(£2.907 billion) and CVC CapitalPartners’ purchase of Sky Bet(£702million) later that year. “So wecan see that valuations are rising andthat there is a bit of a gap in activitybetween November 2013 and March2014 as the industry sat back andthought out the ramifications of thePoint of Consumption Tax. It’s quiteclear, however, that M&A activity isabundant but the jury is still out onwhether or not that’s truly indicative of industry consolidation on a larger scale.”

Turning back to Deutsche Bank’sstatement, Mr Stocks disagreed with the assertion that the market is slowing and demonstrated that it is in fact growing quite substantially.Despite the World Bank’s findings thataverage global GDP growth in 2013was 2.9%, year-on-year the gamingindustry grew by 8.6% overall. In 2014, growth rates dropped to 5.7%,

however year-on-year growth isexpected to increase again to 10.5% in 2015 (E), 10.7% in 2016 (E), 10.7%in 2017 (E) and 10.5% in 2018 (E).“Nobody is saying that this is a sectorthat is going backwards or slowingdown. Future growth is going to bedriven, in my view, by more marketsopening up, the double edged swordof regulation and as more capitalopens up with increased regulation.”

Looking at the European position,which concerns a more mature marketwhose growth rates, one wouldexpect, to be lower; Mr Stocks againdemonstrated significant growth ingaming. While World Bank averageGDP growth across Europe between2009 and 2015 was found to be 1.6%,gaming market growth in 2013 was8.7%, followed by an estimated 9.1%in 2014 (E), 5.2% in 2015 (E), 6.0% in2016 (E), dropping to 3.8% in 2017 (E)and 5.4% in 2018 (E). “So we can seethat from the perspective of operators,particularly in the online space, thesituation is rosy”, he added.

Moving on to operating margins, and Deutsche Bank’s comments about the market being underpressure, Mr Stocks demonstratedthat this was, again, not the case.Online players’ operating margins grew from an average of 17.5% inFY2012 to 19.3% in FY2014, whileretail players’ grew from 14.3% inFY2012 to 15.3% in FY2014. “So,margins in the online and retail spaceare not necessarily threatened, butthey are also not that high. Thequestion then arises; are they highenough to sustain increased Point ofConsumption Tax in the UK and asother jurisdictions cotton on to it? In my view, they’re not high enoughwithout increased volume and will besqueezed, which is an issue.”

Mr Stocks continued in depicting peroperator marketing expenditure as apercentage of revenue, noting that on

average, investments in marketingconstitute more than one-fourth ofonline gambling operators’ revenuebase and marketing expenditurecontributed close to one third of onlinegambling operators’ cost base. Againstan average industry spend of 25% oftotal operating costs, Bwin.party spentan average of 36%, followed by 888Holdings at 35%, 32Red at 33%,Betfair at 29%, betsson at 28%,Unibet at 24%, William Hill at 13% and Paddy Power at 10%. “As we cansee, marketing expenditure continuesto be quite high and can probably beexpected to increase, hopefully associal responsibility becomes moreprevalent, and all these costs aroundthe capture of a customer are going to carry on increasing. So, in terms ofthe Deutsche Bank position, I wouldsay, yes, marketing and taxation costsare increasing. Where I might disagreeis in the opinion that this is drivingconsolidation, rather than just M&Aactivity where marginal players arebeing picked up by the bigger players.”

In terms of regulation, Mr Stocksreminded the floor that an increasingnumber of European countries’ onlinegambling markets have becomeregulated with the rest consideringregulatory changes. A comparison of 2014 over 2010 showed far morecountries holding either fully regulatedstatus, holding regulated monopoliesor being in the process of drafting orreviewing regulation. “That looks like a good thing, but it’s a double edgedsword”, he warned. “Every time amarket becomes regulated, thatcreates more development costs,makes it more complex to operateand, generally, costs rise. However,the more you have regulated, legalgaming and the less reliant you are ongrey markets, the more your reviewsimprove in quality, the more your profitsource improves and the more themoods of your directors improve asthey begin to travel from market tomarket without fear of being arrested.”

“What this also does, and I find this to be very interesting, is as soon asyou have a legitimate territory in handand your revenues and profits arelegitimate, you will attract properinstitutional capital. That becomesquite important.”

“Take the situation in Germany and the recent European Court of Justicedecision involving the Digibet Albers vs Westdeutsche Lotterie. This trialinvolved a local state in Germany,Schleswig Holstein, which had issued50 gaming licences under that state’sliberal gaming act. This move was atodds with federal German law, whichprohibits online gaming. The CJEUreferred the case back to the Germancourts, with the recommendation thatthe licences were lawful until at least2019. The CJEU also raised furtherquestions about the validity ofGermany’s prohibitive stance based on Article 56 of the Treaty of theFunctioning of the European Union.Even with this news that the Germanmarket may soon be in the process ofopening up, I think we’ll soon find thatinstitutional capital will come in, whichin turn will drive M&A activity.”

Moving on to the USA, which wasdescribed as the elephant in the roomwith regards to what could be possiblefor future industry M&A activity, Mr Stocks explained that once the US market does begin the open up,the whole picture could changedramatically. “It has started albeit at a slow pace, having been regulated on a state-by-state basis”, he added. “If you want to find a barometer forthe likelihood of a state opening up I would go online and check the tax status of a given state year-on-year. If tax revenue starts to drop, the likelihood of a regulatory regimefor eGaming coming into play willincrease significantly.”

Mr Stocks alluded to a recent estimatefrom Morgan Stanley which states that

Tim Stocks Chairman of James Stocks & Coand Partner, Taylor Wessing LLP

Red Carnations and Slaying Dragons Tim Stocks

“As soon as you havea legitimate territory

in hand and yourrevenues and profits

are legitimate, youwill attract proper

institutional capital.”

Tim is a lawyer specialising in corporate finance andsecurities work. He was a partner and Head of CorporateFinance and Securities group at international law firm,Taylor Wessing LLP where he was "highly regarded" bythe Legal Directories and recognised as an expert in thisarea of the law. He was nominated for the "FT InnovativeLawyer of the Year" in 2013 and the team was nominatedfor "Corporate Team of the Year" 2013 for a transaction hedeveloped and executed.

2625

“The principle of fiscal neutrality isvery easy to express. It is that similargoods or services have to be taxed inthe same way. If the principle was thatsimple in practice, however, peoplelike me would be out of business.Fortunately, it isn’t that simple.”

Fiscal neutrality is the application, in the context of VAT, of the principle of equal treatment, which is afundamental principle of the law of theEuropean Union, Mr Lasok explained.Equal treatment lies at the heart of thevarious rights and freedoms derivedfrom the treaties setting up the EU.From the perspective of a business,there are two particular aspects to theapplication of equal treatment.

A gambling operator based in Gibraltar,to provide a first example, is entitled to set up a casino in, say, Germany onthe same terms as a Germany-basedoperator, national, or resident. Thisright to equal treatment is the right tobe treated in exactly the same way assomebody already based in, resident in Germany, or who is German.

A second aspect important tobusiness is the freedom to provideservices. In this situation, a gamblingoperator based in Gibraltar, forexample, wishes to provide, say,online gambling services to acustomer in Germany. Under EU law, the operator is entitled to do so without being subject to anyrestrictions, either imposed by the

Gibraltar authorities on the export of the service, or by the Germanauthorities on the receipt of theservices in Germany.

Restrictions in this context are anyprohibition, or impediment, orobstruction to the conduct of thebusiness in the way the operatorwishes. This is not just the applicationof the principle of equal treatment, but a straightforward prohibition onrestrictions on the cross-frontierprovision of a commercial service. This is because one of thefundamental aspects of the EU is the idea that the factors ofproduction – goods, labour, servicesand capital – should be permitted tocirculate freely throughout the EU.

“Where equal treatment comes intothis cross-frontier provision of servicesis in this way”, Mr Lasok continued.“There is an exception to the generalprohibition of restrictions on theprovision of services. Member statesmay impose some restrictions if theyare justified in the public interest.There has to be an overriding publicinterest justification for them. But, you never get into that if the way they operate - the restriction, the waythey implement the justification - isdiscriminatory. They have to respectthe principle of equal treatment. So if,as indeed it is accepted, it is right toimpose restrictions on the provision ofgambling services in order to protectthe public, then whatever the

Fiscal Neutralityand VAT

Paul Lasok QC, Head of Monckton Chambers, is considered by many of his peers as a heavy- weight in EU law where his main areas of work include agriculture, competition, public & administrative law, public procurement,telecommunications, state aid, trade law (anti-dumping) and VAT & Customs Duties.

Paul Lasok QC, Head of Monckton Chambers

“The principle offiscal neutrality is

very easy to express.It is that similar

goods or serviceshave to be taxed in

the same way.”

the US online betting market could beworth £274.7 million by 2017. Thoughthis estimate constitutes one-third ofits initial estimate of £0.9 billion due to lower than expected domesticrevenue in 2014 (actual: £93.1 million;estimated £454.3 million), he notedthat a move towards interstate onlinegambling being regulated at a federallevel, which increases liquidity with alarger number of players, will belooked for as a major growth catalyst,particularly amongst potential privateequity investors. Mr Stocks remindedthe floor that more than a trillionpounds of cash funds is available with the private equity funds, a portionof which can go to the increasinglylucrative online gambling sector.

Gambling focused US private equity(PE) funds have raised the maximumamount over the last ten years at£63.7 billion, followed by Europefocused PE funds at £56.8 billion and UK focused at £42.6 billion.Estimated ‘dry powder’ or cash like,capital – capital that has not beencalled for investment – available to thesame gambling focused PE funds isequally healthy, with US PE fundsholding £18.9 billion, Europe focusedPE funds holding £13.8 billion and the UK focused holding £11.6 billion.This indicates that a large wall ofimmediately available dry powder cash can quickly be channelled into the gambling sector should theinvestment opportunity arise. Lookingat the total size of PE funds available;the US holds £1.698.3 trillion, Europeholds £1.519.9 trillion and the UK £718billion, of which £495.8 billion, £427.3billion and £183.2 billion is estimated‘dry powder’, respectively. Indeed,private equity has increased such that total assets under managementworldwide have increased in valuefrom £480 billion in 2000 to £2.538trillion in June 2014: a compoundannual growth rate of 9% despite the financial crash. “So, that littletsunami of money won’t stay idle, it will be deployed. The morejurisdictions are regulated the more comfortable the private equityinvestors will be in deploying fundsinto this sector. Therefore, there will be liquidity coming in to drive M&A

activity and, through that drive, a scale of opportunities to driveconsolidation.”

“So what’s the sense of travel forM&A in the gaming sector? Well,those that go looking for gold areprobably going to go looking atterritories where there is no point of consumption tax. We can see thattrend already underway with UK basedoperators focusing on Australia andgoing through a series of acquisitionsthere. So we can see that there is asurge on to try to move acquisitionsand M&A activity to bigger areaswhere there is a regulated market and a lower cost base.”

“But there are also, of course, newdevelopments in the sector which are also of interest to operators andwill be a key feature of any targetselection. Social gaming for example,is a favourite because there is a bigquestion mark as to what theregulatory status is. In the US socialgaming is very popular though itremains unregulated, and there are afew who are saying perhaps it doesn’tneed to be. Social gaming contributes£1.1 billion to the total £23.5b billioneGaming market, and is expected toreach £4.7 billion by 2015. This is arelatively small slice but it is set toexpand as it becomes driven by theconnectivity of mobile devices. Globalconnections between mobile devicesare expected to reach 8.5 billion in2017, with Asia Pacific forming morethan 50% of connections. And asdeveloping countries like Africa comeinto the arena of the social gamingspace, suddenly you have a wholeplethora of new opportunity in this lowcost, high penetration market. Indeed,overall, mobile gaming is expected toreach 16.6% of the total eGamingmarket in 2015.”

Mr Stocks demonstrated that manyonline gaming operators and gamingsoftware providers are trying to grab a piece of the social gaming spacethrough mergers and acquisitions. In June 2014, for example, BallyTechnologies announced its acquisition of Dragonplay for£59.9million. In December 2012

Caesars purchased Buffalo StudiosLLC for £31.6 million and in January2012 IGT purchased Double Down for £326.4 million.

Increased regulation has also led to a convergence in business to business(B2B) and business to customer (B2C)online gaming segments, Mr Stocksexplained. Many online gamingsoftware providers are diversifying into the B2C segment by acquiringeGaming operators, as was mostfamously demonstrated with Amaya’s2014 acquisition of Rational Group. This helps B2B firms achieve a largergeographical footprint, provide greaterproduct offering and reach anincreased customer base of online as well as land-based operators.Similarly, in the affiliate market,operators’ acquisition of affiliatesenables them to increase theircustomer base and expand marketingopportunities. Overall, such behaviouris part of an overall trend in the B2Bsegment towards acquiring in order to diversify their operations incomplementary sectors.

“Moving towards a conclusion, itseems to me that, yes; M&A activitydoes exist within the gaming sector.I’m not persuaded yet on whetherthat’s a consolidatory bubble for thegaming sector or a general featurecommon across all industries wherepeople are toying with expansion.Technology and platform providers are going to be doing a lot of the M&Awork to try to move up the value chainand closer to the customer. Lookingforward, I think Europe will continue to dominate in terms of the globalindustry. However, the US comingonto the scene will be quite a threat in terms of the consolidation ofcompanies away from Europe. Whilsttaxation will drive behaviour in termsof international arbitrage, as point ofconsumption increases the playingfield will become level again. Finally,why is all of this for real? It’s that wall of PE fund money, which isincreasingly attracted to the sector and which will drive deals andvaluations in the future. Thank you.”

“Why is all of this for real? It’s that wallof PE fund money, which is increasinglyattracted to the sector and which willdrive deals and valuations in the future.”

Paul Lasok QC

2827

“Fiscal neutrality is theapplication, in the context of VAT, of the principle ofequal treatment, which is afundamental principle of thelaw of the European Union.”

restriction is, it is only legal if it is non-discriminatory i.e. if the principle ofequal treatment is respected.”

Mr Lasok noted that, even if arestriction respects the principle ofequal treatment, it still has to beproperly based upon the grounds ofjustification used to support it, and itmust be proportionate, meaning itcannot go any further than is absolutelynecessary. There are now quite a fewdecisions from the European Court on the application of these principles in the context of the offshore provisionof gambling services.

In general, the principle of equaltreatment is expressed as the principlethat persons or situations that are the same have to be treated in thesame way unless there is an objectivejustification for treating themdifferently. “So you can have situationswhere there is some objectivejustification lurking around, hence you might have different forms ofgambling that may require differentrestrictions or different solutions to the public interest in protectingconsumers from the particular type of gambling in question.”

Mr Lasok elaborated, explaining that,in the context of VAT, where fiscalneutrality is a manifestation of theprinciple of equal treatment, thatprinciple is more usually stated asbeing that the supply of goods orservices that are similar or the same have to receive the same taxtreatment. However, “there is nofurther add-on in the form of an‘unless’, which relates to the possibilityof there being an objective justificationthat may lead to a difference oftreatment.”

The reason for this, Mr Lasokexplained, lies in the structure of VAT legislation, which is derived fromlegislation adopted by the EU. That EU legislation is implemented by themember states. This means that the

main fiscal policy decisions that mayjustify or result in similar things beingtreated differently for tax purposes aremade at EU level, not by the memberstates. The member states implementthe EU legislation. Fiscal neutrality is therefore used as a principle tointerpret EU legislation but not as a means of overriding fiscal policydecisions made in EU legislation.

“When you turn to the nationalimplementation of EU VAT legislation,however, fiscal neutrality becomes amore powerful instrument”, he added.“Fiscal neutrality is there not simply to assist in resolving a dispute aboutobscure language and legislation; itcan knock away at domestic legislationthat falls foul of the principle. Hence, in the Rank case, what happened wasthat the same game of bingo couldstart off being exempt from VAT andcould, during the course of the game,change into a taxed supply for VATpurposes. That was contrary to theprinciple of fiscal neutrality and theconsequence was that the taxation ofthe bingo game became unlawful andthe UK tax authorities had to return the tax that had been collected.”

The problem of discriminatory taxationof gambling is, however, not limited tothe United Kingdom, and is particularlyacute in the context of VAT. This isbecause of the fact that EU VATlegislation requires all forms ofgambling to be exempt from VAT butpermits member states to limit theexemption. Member states have adiscretionary power that they can use to cut back on the exemption. The member states are not required to behave in exactly the same way.They can make their own decisions as to whether or not they limit theexemption and, if they decide to do so, which forms of gambling theydecide are going to be taxed.

Fiscal neutrality cannot be used totarget disparities which occur in taxtreatment as between different

member states. For example, ifMember State A wants to leave slotmachines exempt and Member StateB wants to tax slot machines, fiscalneutrality does not help. This isbecause VAT is a territorially based tax. VAT operates within a given fiscal jurisdiction and that is thejurisdiction of each member state.Where fiscal neutrality does applyis within the state.

“For example, in the case of Spain,you cannot have one tax treatment inCatalonia and another in Castile”, MrLasok explained. “In the UK, you can’thave one tax treatment in Scotland andanother in England, so far as VAT isconcerned. Scottish independencewould change that because Scotlandwould then be able to make its owndecisions if it were a member state of the EU or, if it left the EU, then theposition becomes different again. But at the moment devolution in theUnited Kingdom does not alter the fact that in Scotland the tax treatmentin the VAT context has to be the sameas in England.”

“When we look what goes on within aparticular fiscal jurisdiction, and at thepower of member states to limit theexemption for supplies of gambling,the difficulty we have is that memberstates have a free hand. It’s debatablewhether they can take away theexemption in its entirety. The EUCommission in Brussels seems tothink that member states can,although personally I doubt thatbecause the EU legislation permitsmember states to limit, not remove,the exemption. If you imagine thewhole universe of gambling services,they can cut out a corner and tax that.What they can’t do is tax the whole lot.They can nibble away at the edges, butsomething has to remain exempt.”

When the member state exercises this power, fiscal neutrality comes inbecause the member state has to becareful that, if it decides to tax some

particular form of gambling, it does not infringe the principle of fiscalneutrality. “If it does, what thenhappens is that everything defaultsback to exemption because it isexemption that is required by the EU legislation. That’s why a failure to comply with the principle of fiscal neutrality means that the taxauthorities have to pay the money they have collected back. This raisesthe question of how we decidewhether one particular form ofgambling is similar to another, so that we can answer the question of whether fiscal neutrality applies and negates a particular aspect of the tax treatment of gambling in amember state.”

Drawing again upon the example ofRank bingo, Mr Lasok noted a hugedebate surrounding the application ofthe test of similarity. He explained that,in Rank, the tax authorities maintainedthat there had to be an element ofcompetition between the taxed andthe exempt forms of the gamblingbeing compared. In the bingo case,because the change in tax statusoccurred during the course of thegame, there was no effect oncompetition because it was the samegame; “it was not a case of the peoplemarching up to an emporium at whichthey can play bingo and choosing oneform of bingo that was exempt overone that was taxed. The tax authoritiessaid that was not the situation andtherefore the principle of fiscalneutrality was not infringed.”

“That way of looking at similarity was rejected by the European Court.Instead, we’ve got a test which isoriented around the objectivecharacteristics of the type of gamblingin question. It focuses on the reactionof, or the assessment made by, thetypical or average customer. So if, from the perspective of the typical or average customer, two forms ofgambling are interchangeable in termsof the needs that they satisfy, then

they are similar. They don’t have to be identical in every respect; thequestion is whether or not, from theperspective of the typical or averagecustomer, they are perceived to beinterchangeable, even though theremay be differences between them.”

Similarity is not determined byreference to such things as theregulatory regime that applies. Takinggaming machines as an example, priorto 2005 there were different types ofregulation for different types of gamingmachine. The fact that the regulation is different is, however, irrelevant.Regulation can be relevant but only if what it does is to have an effect onthe way in which the customer’sneeds are satisfied by the particularforms of gambling looked at. Eventhen, it must be an effect that isregarded by the typical or averagecustomer as differentiating the two or more forms of gambling being compared.

“Some things have been held to becapable of differentiating differentforms of gambling such as differencesin stakes and prizes, chances ofwinning, different formats, the degreeof interaction with the customer – but at the moment these things aremerely capable of differentiatingdifferent forms of gambling. Thequestion whether or not any of themactually does so is really a question of fact that has to be answered, again,from the perspective of the typical oraverage consumer.”

“This causes problems, because theEuropean Court has not answereddefinitively how you can wrestle withthings like different stakes and prizes,and so on. But there’s anotherdifficulty lurking around which is thatthe European Court, at different times,has regarded gambling either as a formof entertainment or as a means bywhich the customer gets some money.Regrettably, it has done this in relationto the same thing (slot machines). If

the European Court had said in onecase, ‘we think that form of gamblingA is one that’s properly regarded asentertainment', and in another casesaid 'form of gambling B is a situationin which what the customer thinks he is getting – the need that is beingsatisfied – is the need to get somemoney', then we would have quite a reasonable basis for the start of a debate. But the problem is theEuropean Court has made thisjudgement in relation to the same form of gambling – slot machines.”

Mr Lasok referred the audience to acase known as RAL, which involved a supplier of slot machines inamusement arcades in the UK. Theargument put forward by Mr Lasok,was that in the case of the supply of slot machines what the customerreally wanted was the chance ofgetting money, not entertainment.“The European Court said ‘you mustbe joking, it’s all entertainment’. Then, in the Rank slot machines case,several years later, the European Court looks at slot machines again, has forgotten about the RAL case, and it suddenly pops up with thepronouncement that in the case ofgambling generally and including slotmachines, what customers are after isthe opportunity to win – not simplyamusement or entertainment.”

“Now, if a gambling activity isregarded by the average or typicalcustomer as a form of entertainment,as many gambling activities clearly are,differences in stakes and prizes or inpayout, even differences in the chanceof winning, begin to look irrelevant.Indeed, on the evidence they may not be relevant at all. Particularly,differences in format might be moreimportant, because one can easily seethat some formats look obviously likeentertainment whereas other typesare a bit ambiguous.”

"If you take the example of a punterwho goes into a betting shop, lays a

3029

“There are a lot of questionsthat member states have to answer.”

bet on the outcome of a horse race,and then hangs around and looks at a television screen or monitor andenjoys a horse race, what is going on?Is it entertainment, or something else?The difficulty with the scenario I’ve justdescribed is you can look at it in morethan one way. You can say that thereare two events or experiences goingon. One is the experience that thecustomer has of placing the bet in theanticipation of something. The placingof the bet is meeting some particularneed. What is that need? Anotherexperience he’s having is standingaround looking at that horse race andenjoying the excitement of the race.What is that? That is, in all probability,entertainment. His sense of interest inbeing entertained by the event may beenhanced by the fact that he’s placed abet, so he may be more interested inthat race than the one immediatelybefore or after it. But, in any event, his experience through watching thescreen or monitor is an entertainmentexperience but is separate from thatwhich he had when he placed the bet.”

“So you can argue that the twoexperiences are different, and you canargue that the two experiences satisfydifferent needs on the part of theaverage or typical customer. And if youseparate them off, you may say thatwhat is really spurring the customer onwhen he places the bet is not a formof entertainment but something else;something that you don’t see in atypical game of chance in which thereis more of a sense of the customerstriving to win, to beat the machine or other players. But this kind ofbeating is not necessarily gettingmoney, it’s the struggle.”

“What I have just explained is wherewe currently are in the application of fiscal neutrality in the context ofgaming. The way I’ve put this mayappear to you, as people who are inthe industry and therefore rather betterinformed than lawyers and judges areabout what goes on in the context ofgaming, rather crude or simplistic. But at the moment, in terms of the development of a kind of legalunderstanding of how you can applyfiscal neutrality within the context of gaming, that is where we currently are.”

“In the Rank case itself, there wasn’tall that much debate about similarityfrom the perspective of the averageconsumer because in the bingo case,bingo is bingo; the change in tax statusoccurred during the course of the verysame game. In slot machines, themain groups of slot machines we were comparing were accepted to be similar in terms of their objectivecharacteristics, but the debate wasabout other things that were found to be misconceptions by the European Court.”

“The exercise that I was doing in frontof the UK Supreme Court, which [atthe time of writing] was the latestdevelopment in the Rank trial, wasabout the interpretation of the UKlegislation enforced, in effect, from1968 to 2005. It was a pretty reconditeand arcane debate not least because it was focused on legislation that nolonger exists, but here the debatetouched very tangentially on thequestion of similarity as it arisesin the context of gambling.”

“We don’t know what is going tohappen or what the Supreme Court is going to decide. Whatever it doesdecide will determine what willhappen at the next stage of the Ranklitigation because this stage, whichmay or may not happen, is going to be an argument about similarity asbetween FOBTs and certain types ofgaming machine that were around atthe same time as FOBTs, and whichwere taxed at the same time asFOBTs were exempt. That’s going toget into some of the issues that havebeen left unresolved by the EuropeanCourt in its decision about the Rankcase. I also ought to mention that inRank, when we were looking at thequestion of similarity - although as Ihave said the arguments didn’t need tobe developed fully - we ended up withevidence largely from people withinthe industry, from manufacturers andoperators. This isn’t the best kind ofevidence to submit in many of themember states because if you’relooking at the question of similarityfrom the perspective of the average or typical customer, then you need tohave evidence more closely calibratedto observable customer behaviour.What you want in order todemonstrate similarity is

evidence that shows, to provide a basic and not entirely accurateexample, that if a customer walks into a betting shop and is faced withtwo rival things, does he ditherbecause he’s going to have to chooseone or the other? If, on the other hand,his reaction is ‘that one is definitelydifferent from that one’, and he goesstraight for the one he prefers, youthen have got the very stronglikelihood that you’re dealing withsomething that isn’t similar.”

Mr Lasok explained that hispresentation thus far hadencompassed the fiscal neutralitydebate to date because many issuesremained unresolved. This is becausethere remains significant difference intreatment, member state by memberstate, concerning forms of gamblingthat are either actually the same orsimilar enough that the principle offiscal neutrality is likely to apply.Moreover, there exists regulatory rules which are very often associatedwith the tax position, whether they bethe application of VAT or a non-turnovertax such as a betting or excise duty.

“In many instances what the memberstates are doing is highly questionableeither as a matter of VAT law or as amatter of the rather more generalprinciples of EU law which are basedon equal treatment but also concernedwith ensuring that there is true,unrestricted freedom to provideservices from one member state to another. So, we’re in interestingtimes, we can see there arejudgments coming out from theEuropean Court on a number of these points which are showing that there are a lot of questions thatmember states have to answer.”

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“We are at a point of reflection;”, Mr Montegriffo opened, “with theUK General Election under way, withthe PoC tax in the UK potentiallycoming to a resolution in May, withthe judgment to follow, all of whichwill set the pattern for what willhappen in Europe. We have perhapsa more sanguine and balanced viewof the way in which the US is likelyto pan-out. So, as we stand here inthe context of that environment:

What more should we be doing toreboot the industry after this periodof uncertainty and reflection?”

Pat Harrison: “For us it’s notnecessarily a reboot but more of a

recalibration. This is a theme that was touched on in this forum last year when we were talking aboutchallenging the UK’s then proposedregulation. One thing that Paul Leylandobserved very keenly was the fact thatas operators we were very disparate.We didn’t have a uniform voice anddidn’t represent ourselves very well topoliticians or regulators. I think thattheme has certainly been picked upagain today. For me, that recalibrationmeans that as operators we need tobe working together and in unison toregulate what we do –to make surethat there’s one single voice – and actin a way that removes that air ofsuspicion that seems to hang over usall the time. For me it’s about getting

our act together, working together andgetting almost to the point of self-regulation. We’re very good at beinginnovative and creating solutions toproblems, let’s have more of the same;present a united front to the peoplewho make decisions and make thedecisions ourselves.”

Martin Weigold:Mr Weigold agreed,adding that Gibraltar’s campaignagainst the UK’s taxation proposalswas in some respects a positive stepforward in the industry’s ability to actwith a unified voice. “Certainly, we canstill do better on that front. Whateverhappens, gambling is always going tobe regarded as a sin-stock and politicalfootball; it’s never going to be a nice,

Panel Session:The Evolution of Gaming – The Operators’ ViewModerated by:

Peter Montegriffo QC, Partner, Hassans

Peter has advised on numerous financial services, regulatory and trust relatedmatters. He was closely involved in the IPOs of various gaming companiesestablished in Gibraltar, which have been listed on the London Stock Exchange, andhas been closely involved in drafting numerous changes to Gibraltar’s legislation intrusts, financial services and gaming areas. His knowledge of these fields has led himto contribute to a large number of articles and books on Gibraltar’s legal system andfinancial services sector. Peter regularly speaks at international conferences relatingto these areas of practice and his work frequently requires him to deal with multiplejurisdictions. He is a member of the pre-eminent global gambling law networking and education organisation, the International Masters of Gaming Law. Peter was also Gibraltar’s Minister for Trade and Industry, with responsibility for economicdevelopment and financial services, between May 1996 and February 2000. Peter was appointed as Queen’s Counsel in Gibraltar in June 2014.

Panellists:

Pat Harrison, Operations Director, 32Red

Ralph Lichtmannegger, Head of Customer Relationship Management, digibet Ltd

Martin Weigold, Chief Financial Officer, bwin.party digital entertainment plc

“Present a unitedfront to the peoplewho make decisionsand make thedecisions ourselves.”

Peter Montegriffo QC

fuzzy market. So, for me it’s aboutmaking sure we educate the regulatorsand the government the whole time, a constant engagement programme.Once governments have made theirmind up it’s very difficult to reverse the process, as we found out in thePoC discussions with Treasury.”

Peter Montegriffo: “Given that somuch of the problem seems to be ofperception rather than fact; how far do you get by pushing the facts?” Mr Montegriffo asked. “Even if youpush the facts with the policy makers,it seems a large part of the problem is the tone of the industry – the toneof the adverts, the way the industryputs itself about. It seems to me to be a matter beyond empiricalevidence when dealing with politiciansand the public. Would you say that’s fair?”

Martin Weigold: “I think that’s a fairpoint, and if you’re alluding to the factthat there is a lot of advertising forgambling products in the UK then I do think that could lead to furtherregulation. Unfortunately, cutting backon advertising is not something thatwill be easy for the advertisers tomutually agree, particularly if thatmarket is your main area of focus.”

Is this a broader European issue as well?

Ralph Lichtmannegger: “Broadlyspeaking yes. Digibet are not involvedin the UK market any more due to therecent changes, and we were alwaysin support of what was being done bythe GBGA towards the UK authoritieson the matter. It is important to haveone voice; this is a core market whichcould have a spill over effect for ourmarkets in Europe. I do believe that we as a sector have a lot in commonand to battle against in any jurisdiction.

Working more closely together in thefuture can help us.”

How are the different factorsaffecting how you reach clientsimpacting who you are reaching and retaining?

Pat Harrison: “We have certainly seen drastic changes in the wayspeople are accessing our products, but for me it’s more about how youreach that audience. What is changing,for example, is how the youngergeneration views TV. Very few of a certain generation sit there andwatch scheduled TV programmes; they choose what to watch when they want to watch it, making getting your product in front of them very difficult.”

Martin Weigold: “In certain areas weare seeing changes in demographics.As you would imagine, thedemographic split is heavily malefocused for us, at around 87%.FoxyBingo, however, is skewing theother way at 76% female. That splitacross the brands is relatively stable.However, we are seeing across theage groups - and about 60% of playersare in the 18 to 34 bracket – a slightskew towards the younger players. I think that mobile and touch devicesare a driver of that. That move is notoverly significant however, so I don’twant to over-emphasise it. We haveseen an increased propensity amongstmales to use mobile and touch screendevices, but I think that partly reflectsthe fact that the bwin brand enjoys a very male biased group of playersplacing sports bets, and obviouslymobile is very helpful for live betting.”

Ralph Lichtmannegger: “We aredefinitely seeing more female signupsas well as more people aged 60-plususing our services. Having said that,

it’s sometimes not so easy todetermine who’s actually placing thebets. It could be that the traditional,younger male clientele wants toreceive their bonus for the extra sign-up. The verification process runssmoothly with full due diligence, so onpaper we’re seeing more female sign-ups and on paper we’re seeing more60-plus users, but we cannot be surewho is actually placing the bets then.”

What has held back a moredetermined industry consolidationand what will the next 12 to 18months produce?

Pat Harrison:Mr Harrison confirmedthat there are certainly more drivers for consolidation, particularly within the UK. He noted, however, that the‘year of consolidation’ has beenheralded for some time without beingrealised. He voiced his concerns thatthe investment community is scared of engaging with currently volatilegaming stocks, adding that one area of concern lies in convincing theinvestment community of thetransparency and quality of listedgaming companies and their likelycommercial trajectory.

Martin Weigold: “Let’s not overlookthat there has been some prettysignificant transactions in the sectorrecently – like Amaya’s purchase ofRational. I expect further consolidationwill play out – we’ve said it publically.We think there should be furtherconsolidation in the sector and intendto play an active part in the process.Indeed, we are in talks with otherparties at the moment.”

The argument for consolidation, Mr Weigold explained, is certainlyapparent. Operational costs are risingwith the move to nationally regulatedmarkets, requiring companies to

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Peter Montegriffo QC

acquire scale in order to absorb thosecosts. Gaming duty, bespoke platformdevelopment and processes aresimilarly costly, as is competition from new-entry land-basedincumbents. “The drivers likely to slow consolidation in the sector tendto be the markets where operatorsgenerate revenues and profits from.You would be quite surprised by the difference in opinion concerningthe legality of operating in certainmarkets and how sustainable thosemarkets are.”

“Another issue can be with respect to the valuation aspirations of largeshareholders in certain companies;whether or not a deal can be struckthat gives the buyer the return they’relooking for and the vendor the exit theywant. Then another factor whichintroduces uncertainty to the processhas been to what extent the VAT issuewill affect companies. This has beenanything but a straightforward exerciseand all companies have been looking at the VAT law in each jurisdiction andhow that interacts with EU law beforedeciding what approach they will take.That process is now largely behind us and I’ve been quite surprised at the degree of unanimity in theconclusion. So I think a lot of thestalling is down to the degree ofuncertainty operators have faced.Lastly, with respect to the UK,operators have been waiting to see,when looking at smaller operators,what impact the UK’s PoC will have.”

Ralph; what are your expectationsconcerning the current courtproceedings in Germany and their likely repercussions?

Ralph Lichtmannegger: “I’ve been inthe industry for ten years now and inGermany I’ve not known anythingother than uncertainty. I wish I couldshare some facts and figures, but I’mstuck with reading tea leaves. You canask five different lawyers about thepotential outcome in Germany, but Ithink your money is better spent on afortune teller – at least then you knowthe prediction is incorrect. Germanydoes not allow for mid or long termplanning and as one of the smalleroperators we suffer: we need to seehow long we can maintain operating in this grey area whilst at the sametime shouldering the tax burden anduncertainty, and the impact that has on

our offline business too. I would havehoped that by now we could see somelight at the end of the tunnel, but I nowdoubt it’s going to be resolved anytime soon. Until I hold a licence in my hand, I remain sceptical. We canhappily live in a grey area, and havedone so for many years, but it’s notenjoyable. We need a clear cut case toencourage investment. Perhaps if alimited number of licences are issuedin Germany we’ll see some movement.”

How do you see the emergingpotential of decentralisedapplications, cryptocurrencies and the blockchain?

Pat Harrison: “We’ve all got ourconcerns, which are once again borneout of regulation – the source of funds and KYC stuff. What is differentwith this particular aspect is thatmerchants, operators, all sides of theequation, seem to be working togetherto try to convince regulators to take alook and see if there’s something wecan regulate in the future. In terms ofaccepting cryptocurrencies and wouldwe do it, well potentially we alreadyhave because you can fund yourNeteller wallet with Bitcoins. But Idon’t think it’s going to change theworld. I think the greater potential lies in the technology that underlinesthe Bitcoin platform. I don’t reallyunderstand it I’m afraid, I’m sure there are people here who do, butapparently it is the next thing sincesliced bread.”

Martin Weigold: “My view on Bitcoin is it sounds quite interesting for the future, but right now it’s notparticularly exciting for us. About onein two thousand people have a Bitcoinaccount, and we operate in regulatedand taxed markets, so it’s unlikelywe’re going to get any incrementaldeposits simply by offering Bitcoin. All of our customers have a range ofpayment options available to them and don’t require another one. Therehave been a number of issues withaccepting it and a number ofcompanies are coming up withsolutions for that, which is good. But volatility aside, it gives rise to anumber of issues and we’ve been toldby our principal bankers that if wewere to accept Bitcoin it could causeinternal issues at the bank. Our policyis very much a case of wait and see.That’s not to say that there isn’t a role

for Bitcoin in online gaming, however.A lot of smaller operators in certainmarkets – Africa, Asia – could well finda use for Bitcoin, and perhaps makesome additional revenue from thespread on conversion. If the currencywas regulated, however, that would be a very different situation.”

How do you see the industryevolving over the next two, then five years?

Pat Harrison: “I’ll start with five years hence, which will hopefully be as vibrant as it is today with plentyof choice for the consumer. Thechallenges are that those choices willbe eroded because of the expense ofoperating and you’ll have two or threebig players who will dominate themarkets. Short term, I think we’ll see a period of consolidation. Notconsolidation as we were talking about earlier, but a chance to get backto running our businesses after thedistractions of licence applications,legal fights and so on. Let’s get back to running our businesses, workingtogether and looking at selfregulation.”

Ralph Lichtmannegger: “Ourbusiness is one of the present, more than the future. However, Iwould like to see the regulatoryburden lifted for the industry to worktogether on that agenda. We have afew very good bodies working towardsharmonisation, but this is still very faroff and quite an idealistic viewpoint.”

Martin Weigold: “I agree, and wouldadd that in the next two years we’llsee more transition to nationallyregulated markets with the inevitablesqueeze on margins that will bring. Wewill see as a result some consolidationplaying out and I think we will seeoperators focusing on fewer markets.You can have a substantial marketingbudget, but if you’re targeting 20markets, your voice in each becomesirrelevant. So with nationally regulatedmarkets we’ll see operators focus onselect jurisdictions in the hope ofbecoming a top three player in those.As we look further out, I would like to say that the US will have opened up a little bit more and I think there will be new, unforeseen technologiescoming into play. That has always been a big driver for the industry and will be in the future.”

“The greater potential lies in thetechnology that underlines theBitcoin platform.”

“Let’s get back to running ourbusinesses, working together and looking at self regulation.”

3635

“It goes without saying that the role of the regulator is important,” Dr Hofmann opened the morning’sproceedings. “The quality of regulationand its practical implementation issignificantly dependent on the qualityof the regulator; on her accessibility,personality, willingness to continuedialogue with the industry and, of course, her knowledge andunderstanding of the business. Most, if not all, regulators like to describe themselves asindependent, but;

to what degree is your regulatorybody independent and who is itindependent of?”

Phill Brear: “This is a subject thatregulators occasionally find themselvesdwelling on. Some regulators haveperhaps overplayed their independentstatus for different reasons. Mystarting point has always been thatregulators are not just creatures ofstatute, products of legislation; we’re

also products of subordinate legislationi.e. statutory instruments andregulations. A regulator who isn’tsufficiently attuned to the principles of the base legislation or the prioritiesof the relevant political department will pretty soon find him or herself in a tricky situation, be that aroundother policy issues, possibly evenfunding. Whilst these may be someuncomfortable statements to make,and might even be denied in someplaces, I can think of very fewregulators who are not acutely tuned in to politics.”

“Here in Gibraltar, where it is such atight community, in some ways thatrelationship is amplified. It’s essentialthat you are tuned in. But I would drawa line under that and say in a place likethis, if you are at odds repeatedly orsignificantly a democracy says it’s theregulator who walks. So, I would sayI’m professionally independent and ifwe ever reached the stage wherethere was a significant issue where

Panel Session: The Evolution of eGaming –The Regulators’ View Moderated by:

Dr Joerg Hofmann, Melchers/ President, International Masters of Gambling Law

Panellists:

Phill Brear, Gambling Commissioner, Gibraltar Government

Jenny Williams, Chief Executive, UK Gambling Commission

Hakan Hallstedt, Director General, Swedish Gambling Authority

you are at odds with the governmentthen you would have to, as the presswould say, ‘consider your position’.”

Joerg Hofmann: “I understand, ofcourse, you have to execute the law.Sometimes regulators feel like theprovisions provided to enforce that are maybe not the best practicalsolutions. The regulator may feel there are restrictions which createnon-competitiveness, which are badfor the market and the operator. They certainly are independent, but to a certain extent you have to not follow your own opinion.

How do you deal with this kind of conflict in practice?”

Phill Brear: “You have to be able togive advice using the multitude ofcommunication channels available toyou, which we’re able to do here –advice is never unwelcome. But I’mspeaking in the abstract: we’ve neverreached a point where we’ve had adifference of opinion. There have beensituations where I’ve felt it necessaryto give early and very comprehensiveadvice, and I’ve had to give it morethan once, but fortunately we’ve neverreached that situation where the abilityto persuade has even been stretched.In Gibraltar, the government’sobjectives and my values are very well aligned.”

Joerg Hofmann: “This week, weheard reports about an unnamed group of Danish gaming executiveswho encouraged the SwedishGovernment to steer away from theDanish licensing model in favour of the British. However, the Danishmodel, at least legally, has been a popular model for other jurisdictions.

Are the British and Danish models so distinct that one is more attractive and suitable toSweden than the other?”

Hakan Hallstedt: “One can say thatthe current development is reallychanging the fundamentals of theSwedish gambling landscape,” theSwedish regulator explained. “Wehave two state concessions at themoment, Svenska Spel and ATG. Bothare state controlled companies, bothare showing little or negative growthand are in deep conflict with theinterests they are there to defend,namely the funding of horseracing and giving a lot of money to the statebudget. The same goes for the goodcauses lottery, which is fighting alosing battle in retaining theircustomers. There has been a politicaldiscussion for many years; we’ve hadseveral enquiries, in order to perhapschange the landscape. There is amajority of 87% in the SwedishParliament who are for having alicensing system and the ministerresponsible went out and said we’regoing to start an enquiry as soon aspossible. This will, of course, take acouple of years and already there areheaven and hell scenarios put forwardby everyone. We’re going to earn moretax revenues, but the other side ismainly concerned with responsiblegambling measures.”

“When we conduct the enquiry one of the issues will, of course, betax. We have 15% in England and 20%in Denmark. The politicians will, I think,find that if 20% works in Denmarkthen why bring it to 15%? They may,however, not have as low level aseither. Concerning responsiblegambling, Svenska Spel introduced

a lot of measures, but they would have to lower the bar in order to beable to compete with the newerlicensees, which would be a tough sell in the political sense. We also have to discuss what we’re going todo with these monopolists. InDenmark, Danske Spil has beensubject to a lot of criticism due to its maintaining quite a huge advantage.We will have the same situation when it comes to branding and theretail system. So, there are a lot of aspects and we’ll look at all the possibilities.”

Key to this discussion is theaffordable amount of burden for the operator in terms of taxes andfees; could you elaborate?

Jenny Williams:Ms Williamsexplained that the British and theDanish systems are in fact very similar, differing only in tax rates andthe Danish requirement for real-timeprovision of data, complete withspecific software arrangements. In the UK, operators are also expected to keep and make available to theoperator specific records, but not realtime data provision with a specific datasafe which constitute an additionalcost to the operator. “I would certainlyquestion whether that’s necessary,and it is certainly something theSwedish authorities may want toconsider. But aside from that and tax rates, there really is very little to distinguish the two.”

Joerg Hofmann: “Svenska Spelintroduced some very restrictiveresponsible gambling measures,specifically player cards and aprohibition of bonuses and othergambling offers.

Dr. Joerg Hofmann is the current President of IMGL and the group leader of thegaming law practice group of his law firm. Joerg has practiced in gaming law sincethe mid-90s as one of Germany’s leading gaming lawyers. MELCHERS’ legal adviceis highly valued by global market leaders in all sectors of gaming law. Joerg has been ranked as a “Leading Individual” in Gaming & Gambling by Chambers Globalfrequently since 2011. He regularly publishes articles in international experts’magazines and periodicals and serves as a member of the editorial board of Gaming Law Review and Economics.

“The way you act and really are is ofmajor importance to how yourjurisdiction works.”

Joerg Hofmann

“Without properanalysis in partnership

with the regulator and the industry

some policies just scratch the

surface, often thewrong surface.”

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What affect will these measureshave on the market – are theyhelpful or harmful to the market and its players?”

Hakan Hallstedt: “Svenska Spel had a lot of government encouragementwhen it introduced these measures.They tackle issues of integrity andfacilitate the KYC question. They alsohelp with AML measures because you are certain who’s playing. Theseare advantages, but at the same time there has been a clear loss ofcustomers. The slot machines arelosing customers annually, as are otherforms of gambling. Sweden is lookingat a loss of €60,000,000 on its bottomline due to the introduction of the player card.”

“It is, of course, a goal for Sweden tochannel as many players as possible tothe legal operator and I don’t think thismeasure will make those numbers getany higher. At the moment 57-58% ofthe online market is abroad – less thanhalf of the online market is in Sweden.This raises issues of protection,particularly in the slot machines industry.Those machine players with gamblingproblems may, in the worst case,gravitate towards unregulated onlinesites where they may not be offeredprotection. So there are up sides and down sides.”

Joerg Hofmann: “In a way, I feel there is a degree of ignorancesurrounding the black market. If youreally want to protect players then you need to introduce measures which will be successful in doing so. In Germany, we have total prohibitionon online casinos to protect playersfrom gambling addiction. The result is some players find their way to theblack market, which is massive. Thismarket is totally uncontrolled, totallyunlicensed and totally unprotected. Are we successful in practising thesemeasures, or does it make no sense?Moreover, many of the discussions onthis matter are controlled by politiciansand lawmakers, many of whom havevery little knowledge of the onlinegambling market. I would say it takestime. You make little adjustments andyou correct your mistakes over a longterm period. Do you see this happen in Sweden as well?

Do you think prohibition is justifiedin the protection of players?”

Hakan Hallstedt: “I think it’s very clear that the training of politicians,enlightening them using the benefit of industry and regulators’ experience,is important. We have a very high levelof protection, but it’s important to alsooffer balance in order to attract thelicensees. The politicians are thedecision makers, we have to hope thatthey will listen when we say what will,what won’t and what might work. It’sgoing to be a tough sell and a long,tiresome journey to the end but wedidn’t go to the moon because it waseasy. It is a discussion that needs to be had and I’m glad we’re finallyadapting to the rest of the free world.”

What is the discussion in the UK surrounding competitivenessand protection?

Jenny Williams: “There was a longdiscussion about the fairness andopenness of bonuses, and certainlysome people in the industry have beenirresponsible in the way they offer theirbonuses. Yes, it hasn’t done any goodin managing perceptions of theindustry and we are taking steps andworking in that area. Looking at it theother way, from the customers’ pointof view, free bets and bonuses areenjoyable. We’re not in the business ofstopping the normal, healthy gamblersgetting fun from what they’re doing. All we’re worried about is people beingmisled or spending more than theyperhaps should. It’s a difficult balance:letting people have fun but measuringthe activity to stop them gettingsucked in. We’re very interested inpushing the debate and exploring what works.”

“Something else to consider iswhether or not prohibition willencourage others to go elsewhere.Prohibition of FOBTs, for example,could lead players to other machines,other forms of gambling. One of theproblems we have in the UK in thisregard is the anonymous use of cash in these machines, which makes it verydifficult to monitor player behavioursand develop measures for protection.So there’s a real political policy trade-off. Should we, for example, be

encouraging the use of player cards inorder to get better data and see what’shappening to people? But there are ofcourse huge privacy and utility lossissues there which are very muchpolitical decisions. It’s not for theregulator to decide where the cut offought to be in allowing people to doharm to themselves or to ask peoplenot to over-indulge from time to time if they want to. So this debate aboutintroducing player cards for high-stakesbetting is something we really need toengage in with the politicians to helpthem understand what the tradeoffsmight be.”

Joerg Hofmann: “All the regulatorscommit to measures to preventproblem gambling, but in practice a problem gambler can easilycircumvent even the strictest controls.

Where should the line be drawn –the government, the regulator, or the problem gambler?”

Phill Brear: “This follows on fromwhat was said at the beginning.Without a proper dialogue, you getpolicy led by assumption rather thanpolicy led by analysis and evidence. I see and hear too often on the worldstage policy decisions and statementsthat strike me as knee jerk, or reactive.We see policy delivered under theassumption that it is helping problemgambling, but without proper analysisin partnership with the regulator andthe industry some policies just scratchthe surface, often the wrong surface.”

Jenny Williams: “There is often thisgloss where the industry says there is no evidence with which the policymakers can choose X or Y. But there is no evidence if you don’t look for it.That is something we’ve been workingvery hard to do, that is ensure thatdecisions are made on an evidentialbasis and in partnership. But it takesthe engagement of the industry aswell as the regulator.”

Joerg Hofmann: “What we’re lookingtowards is dialogue; dialogue betweenthe industry and dialogue between theregulators, particularly on cross-borderissues. There are different types of regulators; those who educatethemselves by taking part in the

industry and those who rarely seeoutside of their office. Indeed, I wouldlike to thank you all now for beingaccessible and for taking part in thisdialogue, because it is important forthe industry. I was very impressedearlier to hear of the relationshipbetween the ministers here inGibraltar and the industry. I was also very impressed to hear that the industry today is bigger than it has ever been. Phill;

Is there any point at whichGibraltar’s growth must stop?”

Phill Brear: “I think this goes back tomy first point about independent andrational thought. The issue for a placelike Gibraltar is more macro-economicthan regulatory. As a part of theinfrastructure we have the supportservices, the legal profession, theaccountants and auditors, and so on.In Gibraltar particularly there has to bea management of the economy toensure it doesn’t become either over-dependent economically on a particularfunction, or that one function starts tohamper the ability to populate and paytogether services which may or maynot be ancillary to that function. Thelegal function here does rely to someextent upon the gaming industry, asdoes the accountancy. But at the same time there are young people in Gibraltar who aspire to be trainedaccountants, lawyers, bank clerks,shop-keepers, ship maintenancepeople, teachers and all the otherprofessions aside. If the gamingindustry became too intense youwould start to get upward pressure on pay and downward pressure on theavailability of skills. So, I think thequestion of scale in Gibraltar is to anextent regulatory, but I think it’s morea macro-economic one.”

“I keep asking politicians not to usethe term ‘selective licensing’. It’sactually just that we have a higher bar to entry. We can keep raising thebar as high as we want, but we can’tunilaterally discriminate against thosewho meet that high bar simplybecause we’ve got too many. So, yes, the industry can get too large formacro-economic reasons, but I can’tthink of it as a regulatory issue or of aregulatory ceiling which I could legally

impose. It’s an area about which, if we were getting close, we would have to have a very well thought outdiscussion. It would be a question of ‘is it getting too big?’ rather than‘has it got too big?’. I don’t think it’stoo big now, and I’m not quite surewhat too big would look like becauseof this broader economic question of viability.”

How important is the regulator’sindependence and personality?

Jenny Williams: “the point aboutsomething like the UK GamblingCommission as an independentregulatory body isn’t solely its ability to regulate the industry within government frameworks. Where the importance ofindependence lies is in casework. We are absolutely independent oncasework; we don’t discuss with anygovernment department any detailsabout investigations and they have no influence over decisions on alicence holder. I think that’s a veryimportant feature of British and manyother regulatory systems, and that’s an important safeguard for theindustry. In terms of personality one of the things we try to do as aregulator is ensure proportionality,openness, fairness, willingness tolearn, openness in consultation, allthose buzzwords throughout theorganisation and if that ceased to be when I leave the GamblingCommission then I would have failed.”

Hakan Hallstedt: “I talked to the CEO of a major lottery company just a couple of weeks ago and asked what impression he would leave when he left. He said, ‘take your hand, put it in a bucket of coldwater, take it out again and look at the surface; that’s the impressionI’m going to leave behind’. We’re alleasily forgotten, but if the frame isclear it should be filled with the rightcompetence in the perfect world. At the same time, it would be stupid to reject the importance of personalityand openness in the regulator in everycase. Of course, the way you act andreally are is of major importance tohow your jurisdiction works.”

Phill Brear

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“I want to talk this morning about a buzzword that’s flying round thegambling sector, ‘omni-channel’, whichis particularly relevant to the UK retailbusinesses but also to other operatorsfrom a competitive dynamic”, MrLeyland began. “Retail gamblingbusinesses in the UK have beenattempting to be successful remoteoperators for fifteen years or so, withmore failures than successes. Duringthat time they’ve all said an awful lotabout being “multi-channel” beforesome point last year when being multi-channel was no longer good enough.Everybody is now “omni-channel”; a word which is now peppering thedialogue of nearly every large operatorand supplier: nearly all are now hiringto deliver it.”

Mr Leyland continued in explaining that the dialogue around omni-channelhas also, and inevitably, all been verypositive. Omni-channel is deemed tobe an important growth driver for land-based businesses in the remotegaming space. Mobile is nowubiquitous, with a much moreconvergent customer base whichmeans that mobile and land-based can no longer co-exist without the risk of cannibalization. Countering that, there are a lot of operational

benefits in terms of the increasedability to leverage a brand with a singlecustomer view. Omni-channel enablescompanies to create a centraliseddigital living space, complete with asingle, cashless wallet within whichcustomers can view any medium,anywhere and at any time. This in turnallows companies to rebuild presence,improve service, enrich content andsquare the payments circle with lowercosts of customer conversion andstronger retention capabilities. “What’s not to like?”

Multi-channel has become so big it has had to be renamed. Indeed, as Mr Leyland explained, the benefits arenot just limited to the gaming space,with the ordinary man on the streetnow already accustomed to omni-channel marketing from the majority of large retailers. “So it’s here, and it’s a very important driver, but what I want to flag this morning is that omni-channel is not necessarily theforce for good that everybody seemsto think it is. In fact, it is potentially a fairly weak mitigator of somedangerous and offensive behaviour.”

Mr Leyland then drew the attention ofthe summit to a table demonstratingmarket share within the betting, casino

The Multi-channel Value Equation Paul Leyland, Partner, Regulus Partners

Paul was an Equity Analyst in the City for over 10 years, among the first to befocused on the gambling sector. He researched and reported on small and largegambling company stocks, as well as advising many companies in relation to IPO and M&A. During his time in the City he worked for a number of investment banks,most recently Investec and Collins Stewart (now Cannacord).

Following on from this, he moved into the industry, as Corporate DevelopmentDirector for leading gambling company William Hill, advising on retail strategy,regulatory issues, the racing industry, supply chain management, and M&A. Paul has proven strategic and analytical skills, as well as in depth sector knowledge and a broad range of industry and professional services contacts.

“What that channelshift can essentially

mean is that you lose the money on

the land-based sideand you don’t make

it all back on theremote side.”

and bingo retail sectors. Retailgambling was shown to be growingfitfully for the past five years, whilstremote gambling has been growing at double digit percentage rates. Inbeing encouraged to enter the remotegambling space, the retail sector’straditional customer base areintroduced to a more competitive andfragmented market which forces retailbusinesses to compete aggressivelyonline and reduces overall revenue forhigh market-share retailers.

“What this demonstrates”, heexplained, “is that a lot of landbasedoperators, successful ones that havebeen around for a long time, tend tohave a quite high market share in theirgiven retail sector. It is something thatis a given in pretty much every market,including the competitive commercialUK market. The problem is, the remote sector is structurally a morecompetitive, fragmented and dynamicone and it can always, even in a taxedand regulated environment, supportmore operators. Consequently, it’salmost impossible to deliver the samemarket share in remote as you have in land-based, even if you’re very goodat online. William Hill, for example,which has got 30% market share interms of shops in the UK is running atabout 13% in UK online overall – andthere’s a very long list of land-basedcompanies who haven’t doneanywhere near as well as that.”

“The problem with that is that ifcustomers are increasingly choosing to use remote channels as well as, or in some cases rather than, retailchannels; those customers start tobecome exposed to a much greaternumber of operators. It becomesmuch more difficult, then, to controlthe market share in the remoteenvironment as it does in retail. Whatthat channel shift can essentially mean

is that you lose the money on the land-based side and you don’t make it allback on the remote side. That is a clearreason why land-based operators haveto engage in omni-channel. This is thereal reason for omni-channel and it is a negative one, not a positive one.”

For omni-channel to be the good thing that everybody is talking about,Mr Leyland noted that it is veryimportant to get the retail experienceto reflect the remote offering and for it to be much more dynamic and engaging, and not merelytransactional. The transactionalgambler can now be persuaded to use remote devices rather than travelto a retail location because it is muchsimpler. “The retail location has to givesomething better, something different,and in the UK innovation is notsomething we’ve seen very much of at all. The remote offer also mustn’t be so poor that it damages the overallbrand and this is a problem that a lot of land-based businesses in the UKhave. If you’ve got a high market share of casinos, betting shops andbingo halls you can take money offcustomers even if you haven’t investedin those assets for quite some time. If you put up a poor online or mobileoffer, people will spot it as being poorvery quickly. If you don’t deliver themarket share that your brand shoulddeliver it will start to tarnish thebusiness. Retail businesses can’t justbe online; they have to be incrediblygood online.”

Mr Leyland added that the remotedivision for retail businesses is a very big challenge. The market share of migrated customers must besustained otherwise a land-basedbusiness risks losing money by goingonline. The offer also needs tocomplement the retail offering andstand out from other remote offers,

which is a problem that a number ofland-based businesses have. “It’s thislack of differentiation. If you have acompletely vanilla offer that looksexactly the same as the remote onlyoperators, but the remote onlyoperators have some pretty importantbuilt in advantages then you’re goingto immediately suffer. We’ve alreadyseen that in action with the poormarket share of Ladbrokes, or GalaCoral or Rank, compared to theexcellent remote offerings of, forinstance, Bet365 or Paddy Power. The remote operators can be an awful lot more dynamic than retailbusinesses. It’s incredibly importantfor the omni-channel operator to bringthat dynamism in. The remotebusinesses have it already and it’svery, very difficult to migrate across.”

“But omni-channel is also a bit of anissue for regulators and tax collectors.There is the potential to arbitrageproduct. In an environment wherecustomers are much more relaxedabout choosing between retail andremote, having a rigid set of productregulations in terms of stakes, prizes,coupons and that sort of thing, whilehaving a free for all in the remoteenvironment as channels becomemore fungible is going to cause a lot of headaches. It puts the land-basedsector at a considerable disadvantageagainst the remote sector, potentiallyaccelerating its demise.”

“There’s also the potential to arbitragetax. A casino in the land-basedenvironment in the UK is taxed up to 50% against only 15% in online. You can also structure your business in a remote environment in a way that you can’t in a land-based, which is something the government isalready attempting to correct. So,omni-channel isn’t just an operationaldriver or a customer driver, it’s going

“The good thing about a single customerview is you do get a lot more data on what a customer is doing. It’s right andproper to use that data to maximise your response to problem gambling and social responsibility.”

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to start driving the regulatoryenvironment as well.”

“Going back quickly to what we weretalking about earlier; the good thingabout a single customer view is you do get a lot more data on what acustomer is doing. It’s right and properto use that data to maximise yourresponse to problem gambling andsocial responsibility, but it’s alsocertainly going to be the case that that data gets kicked about, politicisedand potentially encourages regulatorychange to the economic disbenefit of the sector.”

“So, is omni-channel a good thing? It’s necessary, because if the retailersaren’t competing effectively onlinethen they aren’t going to be competingat all in the medium term. But it’s notnecessarily good. The problem withomni-channel is that to be a credibleomni-channel operator you need alarge scale retail estate and it’s verydifficult, in an environment with anincreasing channel shift, to see wherethe growth in that retail estate iscoming from. So, to be a good omni-channel operator you’re effectivelysaying you’re going to be shackledwith a large, declining retail footprint,whereas a remote only operator canfocus entirely on growth. Or, if you’rean omni-channel disruptor like PaddyPower, you can choose exactly whereyou’re going to place your shops formaximum omni-channel benefit, again, to the disbenefit of the large incumbents.”

“As we talked about, the remotemarket share is structurally alwaysgoing to be lower than the land-based.It’s expensive, but it’s simple to grow alarge market share in land-based: youopen a lot of units, and/or you buy a lotof units. In online, there isn’t an easyway of building up your market sharebecause it is incredibly competitive.”

“Remote operators also have somehuge inbuilt advantages, which issomething that I think the retail sectorstill hasn’t got its head around. This issimply in terms of being able to takedecisions quickly and having a muchmore flexible supply chain, and alsobeing able to take money from morejurisdictions in a more relaxed mannerthan some more heavily regulated,land-based peers. This means that the retail operators have to create aremote product that’s every bit asgood as the remote only product ifthey’re going to compete at all, whichis hugely expensive and is going tostart driving up the costs of theremote sector.”

“It’s our view at Regulus that omni-channel is not the good thing thateveryone is talking about. It’s certainlynot the time to start feeling sorry forremote only operators who may havebeen expecting a lot of online marketshare growth from retail businesses.It’s a defensive move designed toprotect against channel shift, which is being talked about as a very positive move. Overall, the costs of competition within the remote

market are, by necessity, going togrow because there’s an awful lot of investment going into remotecapability from retail businesses. Theproblem is that isn’t necessarily goingto grow demand. It is going to growcompetition, which means the remoteonly operators have got to join in thisarms race and start improving theirproduct and infrastructure to makesure that the spend they’re gettingjustifies their higher cost peracquisition and/or lower spend createdby the customer reach of the retailenvironment. All that means is that if the awful lot of remote investment(cost increases) which is going on atthe moment is simply being deployedaround competition, which it is, then it won’t increase demand. And if itdoesn’t increase demand, there’s a lotless profit in the system, which hasalso come at a time when UK Point ofConsumption taxes have now comethrough. It’s our view that this is thebeginning of a very difficult cycle for UK facing remote operators ascompetition increases, but not in away that’s designed to drive demandbut instead to try to take market shareoff other operators. If that’s the case,the big winner is the customer; the big losers are many operators.”

“Is omni-channel a good thing?It’s necessary, because if the retailers aren’t competingeffectively online then they aren’t going to be competing at all in the medium term.”

Ms King introduced Featurespace as a machine learning tool whichuses data analytics to monitor and predict individual customerbehaviour in real-time. Sheexplained that the company beganlife as a consultancy spun-out ofCambridge University’s EngineeringDepartment and employedbehavioural understanding methodsfor a variety of industries, rangingfrom financial services to insurance.Featurespace was founded in 2005by David Excell and Prof. BillFitzgerald and in 2008 wasapproached by Betfair to help them continue to grow theircustomer base without needing togrow their fraud team at the samerate. A dedicated fraud system wasdeveloped from Mr Excell’s shedand with very positive results.Betfair renewed its contract withFeaturespace for a further five yearsin 2013, and Featurespace has since

grown to now provide services to 16 companies in the gamingsector alone.

“We’ve been involved in a number of very interesting projects over the years”, Ms King enthused. “One example was an invitation to investigate a case of gamemanipulation, in which we found thatthe probability of the player getting acertain result was in fact 12,800 timesmore unlikely than the odds of winningthe jackpot on the UK National Lotteryseven times in a row. That evidence isnow part of the ensuing court case toensure that justice is done on behalf of the gaming sector.”

Ms King continued in describing what she termed “probably the mostimportant piece of work we’ve beeninvolved in recently”. Here, sheexplained, Featurespace was chosenby the Responsible Gambling Trust to

examine whether it is possible to identify players with addictivetendencies, to distinguish betweenharmful and non-harmful gamingmachine play and, if so, whatmeasures might limit harmful play without impacting those who do not exhibit harmful behaviours.Featurespace found that it was indeedpossible to identify markers of harm,with the results from that study now published and available on theResponsible Gambling Trust websitehttp://www.responsiblegamblingtrust.org.uk/Research-Publications.

Ms King then introduced the Co-founder of Featurespace, David Excell,to demonstrate to the Summit howthe technology works.

“One of the first things we need to askbefore attempting to understand thistechnology is what behaviour is andthen what data do we need access to,

Predicting CustomerBehaviour with Data AnalyticsMartina King and David Excell, Featurespace

Martina King is the CEO at Featurespace, the world-leader- in Adaptive BehaviouralAnalytics. Martina was formerly Managing Director of augmented reality companyAurasma, and has an extensive career in media technology. Her previous leadershiproles include Managing Director of Capital Radio, where she doubled revenues asSales Director and successfully defended the radio station’s number one position inLondon. Martina was also Managing Director for Europe at Yahoo!, where she rebuiltthe UK and Ireland business after the ‘dot com’ collapse and subsequently led therebuilding of Yahoo!’s European division. Martina is also non-executive director ofCineworld and Debenhams.

David is Co-founder and CTO of Featurespace. He has over seventeen years ofexperience transferring technology into practical business applications, and under his leadership Featurespace has grown from a concept to a commercial success withmany blue-chip customers. He obtained a first-class honours degree in Engineeringand IT from the Australian National University before studying towards a PhD atCambridge University. David has been awarded more than 11 prizes and scholarshipsfor his academic and commercial achievements, including the 2011 ITC EnterpriseAward for Young Entrepreneur.

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in order to predict what an individual’sfuture behaviour is likely to be”, openedMr Excell. “We then need to look at howwe apply this to an online or businessenvironment and what behaviourswe’re interested in within that context.Does our customer, for example, enjoyour service? Is the customer going tocome back and continue to enjoy theservice? Are they going to recommend our service to other customers? Are they going to go onto social media and blog negatively?”

Typically, Mr Excell explained, abusiness will collect data around thefinancial information they need in orderto discern the location of incoming andoutgoing funds, profit and loss figuresand whether or not systems need tobe changed around those. To thenunderstand those figures, the businesswill need to understand ‘richer’information about their customers,such as how they were acquired,where they registered, which productsor services they preferred, how theyarrived at that point, whether theirexperience was a positive one, orwhether the depositing process wasconvenient. “All of this informationgives us very rich information as to the behaviour of the customer and the experience they have wheninteracting with the product.”

“So, that’s the type of data that weneed. How do we then go forward and use it in an environment whichfacilitates predictions about what thecustomer is going to do? As people,we’re very good at spotting thebehavioural characteristics ofindividuals, even strangers. We canuse posture to discern their mood and we can tell if they’re lost based onwhether they seem to be wanderingaround. The challenge comes withteaching these very human conceptsto a computer system.”

“When researching for my PhD I wasgiven access to data relating to 180people walking on a treadmill. The

task was to describe or uncover thedifferent types of data that existed in this scenario and which would be pertinent when describing thecharacteristics of an individualinteracting in that environment. By identifying and applying these data points, we were able to discerncharacteristically masculine andfeminine traits which our subconsciousbrain could then use to assumedifferences in people without needingto, say, see their face. If we can get the right amounts of the data we want to track, and make themcome to life, we can describe anddistinguish between lots of differenttypes of behaviours.”

Mr Excell explained that, typically,when analysing data over time it is necessary to find a way ofsummarising and describing that. One of the more popular techniquesused is to look at averages. Mr Excellused the example of two customerswho each deposit an average of £20per week over the course of fourweeks. Using averages they appearedexactly the same, but upon closerinspection it was evident that the twobehavioural stories were very different:one customer was very regular,depositing £20 every week, whereasthe other was erratic, depositing anincreasing amount every day over thecourse of four days. “This could meanhe’s experiencing problems or is afraudster, and is in fact the sort ofcustomer that the operator needs to pay a lot more attention to.”

“I have a friend who wanted to playbaseball but didn’t have a bat. Amazonseemed like the right place to go so he went online. One of the things that really surprised him was therecommendation that came back when he tried to do so. I wasintrigued, so I logged in myself andfound the baseball bat that Matt wasgoing to buy. Then I scrolled down tothe recommendations and was slightlysurprised to be recommended a ski

mask, rope, knife, and pepper spray.Now, this may be a typical average but it isn’t something that I wouldnecessarily buy. This is the danger of averages; if you treat yourcustomers as if they’re all the same you compromise the individual’s experience.”

“So, what is this technology, how does it work and how is it deployed?Put simply, it’s an engine; a complexpiece of engineering that serves thesingle purpose to process data,understand that data and deliverresults back to your business. It’s apiece of engineering that does its job.Known as ‘ARIC™’, it combines datascience with a modern softwareengineering platform.”

“ARIC stands for Adaptive, Real-time,Individual, Change-identification. Eachof these terms describes somethingunique about our software. Adaptivedescribes the fact that ARIC modelsself-learn as new types of fraud occur,which means zero model degradation.Real-time refers to the fact that it canspot anomalies the moment theyoccur. This means there is no need tocreate new business rules to combatfraud, manage risk, identify suspicioustransactions and flag them before theyare actually processed. We don’t justdo this across the entire customerbase but also on an individual profilebasis. We learn the nuances thatdescribe one customer over anotherand we know that no two customersare exactly the same, so we don’twant our analytics to be exactly thesame. This enables us to accept moregenuine customers and optimisetreatment and their experiences. Most importantly, we understandchange. We understand the nuances of when our customers start changingtheir normal behaviour. These nuancesare the most important feature ofunderstanding whether a change issignificant of a risk that you want tointeract with, or an opportunity thatyou want to grow. The system is

“If we can get the rightamounts of the data we want to track, and make them come to life, we can describe and distinguish between lots of different types of behaviours.”Martina King

scalable, can be fully integrated withexisting processes, and is integratableand versatile.”

“So how does this work in practice?Let’s take a casino environment.Typically, one of the first things a newcustomer wants to do is fund theiraccount, which means a whole seriesof activities. The next thing they’relikely to do is stake, so they’ll gothrough a series of staking activities.Now, depending on whether or notthey win or lose, they’ll then go on to other activities. If they win, or win a certain amount, they go on towithdraw, with the chance that they’llreturn or come back. They may also goonto another game to see if they alsohave a chance there. They might staketoo much and decide to self exclude.What we can do is track a customer allthe way through these decision pointsto understand, say, how many betsthey’ll place, what the balance is, whattheir win ratio has been, all the waythrough to then be able to say how thecustomer is transacting through thisjourney and what their next likelydecision is going to be.”

“One of our mobile customers cameto us with the challenge of predictingwhen a customer was going towithdraw from their wallet – and wasastonished with the results. They wereable to use our data to decide that if acustomer was going to withdraw, theywould give them the opportunity to tryanother game and keep them forslightly longer.”

Ms King then returned to the stage to discuss further applications for the ARIC™ platform, and its successrates. She reminded the floor thatFeaturespace are able to follow acustomer in real time, compareindividual patterns of behaviour,compare that person againstthemselves and compare that personagainst the whole global population.“Because we’re able to understandthe individual digital fingerprint of

every single player, we’re able to takea very unique approach to problemsthat have existed for a very long timeboth in the online and offline worlds.”

“If you can understand who a personis and what their normal patterns ofplay look like, you’re in a position touse the anomaly spotting technologyto identify an account takeover, hack or attack, for example. Many fraudcompanies will counter attacks bybuilding walls – they’ll try to guesswhat all the different types of fraudattacks are and build rules againstthem. What we do is to take a totallydifferent approach. Instead of buildingwalls, we said ‘if you genuinely knowyour customer, and you know thebehaviour patterns of your customer,you will be able to understand whetherit’s them or not and therefore be able to flag a fraud attack before it happens.”

“As we mentioned earlier, we’re also working with the ResponsibleGambling Trust and took the data offive operators – which is ten billionpieces of data – to analyse. Evenbefore we worked with this data,however, one of the things we thoughtwould be really fascinating to see waswhether it would be possible to build a health check to separate out thoseplayers who are playing healthily. Let’ssay we’re watching players, particularlyhigh value players like professionalfootballers. If you put up a blunt rulethat says we’re going to permit peopleto only spend a certain amount ofmoney, that isn’t necessarily going todo anything for the enjoyment of theplayer if they’re high net worth. But by following and understanding thepattern of play of that person as anindividual, we can start to see ifthey’re chasing their winnings, start to see unhealthy behaviour, and sendperhaps an alert or flag pertaining to that individual. The system is nowbuilt, it is deployed, it is working suchthat we’re now able to identify a groupof players and say ‘we know that x

percentage of players within thatgroup is playing within theirboundaries, these are the players on our watch list, and these are theplayers for whom intervention isnecessary’. The analytics can feeddirectly into a CRM system and enableyou to manage that intervention.”

“Of course, there’s another part of the project at the moment, which is to identify which of those interventiontechniques are most effective. Theother thing that’s really helpful isyou’re not just taking a sample sizewhich is made up solely of self-excluders. As we’ve heard, one of thethings that people would like to do istry to pre-empt customers going intoproblem areas. So, again, we’re usingdifferent behavioural patterns to makeour predictions.”

“Yesterday we also heard that themarketing expenditure, as far as theonline industry was concerned,equates to about 25% and 30% ofrevenue simply to get the punters inthe first place. We often find, however,that whereas a lot is being done toattract customers, very little is beingdone on retention. This is where wecan employ a new technologicalapproach which enables us to followthese customers and start to predictthe moment they’re going to leaveyou. From that moment in time, we’rethen able to determine what sort ofincentive we’re going to put in place or what type of conversation we needto have on an individual basis. In oneparticular instance, working with alarge operator, we were able to see a massive uplift in monthly revenuesand, more importantly, a 43% increasein revenues from those extra playerswe were able to retain. The gamingsector really is ahead of the curve inembracing a world-leading machinelearning approach to build healthyrelationships with your players, complywith responsible gambling legislationand detect financial crime, and for thatFeaturespace would like to thank you.”

David Excell

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“Ian and his team at SoundReinforcement Systems, who helpedus with the technical installations bothhere and at the Gala Dinner in StMichael’s Cave last night; we reallydon’t know how we would do thiswithout you. Ashgrove Marketing, who are based in the Isle of Man butwho have also done some amazingwork for us here in Gibraltar at variousvenues, in various ways, faced withvarious challenges over the years –thank you.”

“This year we have a huge thank youto make to the Government ofGibraltar – they have supported thesummit since its inception in 2010,with Ministers and the Regulator asspeakers – but in 2015 they really wentthe distance with last night’s gala

dinner – I am particularly grateful toPhill Brear and Paul Astengo, who havebeen very hands-on.”

“Our most sincere gratitude to oursponsors Continent 8 Technologies,Isolas, Gibtelecom, W2 Global Data,Intelligent ID, World Trade CenterGibraltar, Hassans, and Ramparts.Thank you also to our media partnersiGaming Business and GamblingInsider and a very special thank you to the International Masters of Gaming Law.”

“Last but not least, our speakers and of course, everyone here inattendance; we hope you enjoyed it and we hope to see you all hereagain next year.”

Closing WordsMicky Swindale Managing Director,

KPMG Gibraltar

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“After a long two days full of informationand fascinating discussion, I would justlike to finish off with one or two thankyous”, Ms Swindale said in closingKPMG’s fifth eSummit instalment in Gibraltar.

“Last but not least, ourspeakers and of course,everyone here in attendance;we hope you enjoyed it and we hope to see you all here again next year.”

KPMG LimitedTel +350 200 48600www.kpmg.gi

© 2015 KPMG Limited, a Gibraltar limited company and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurateand timely information, there can be no guarantee that such information is accurate as of thedate it is received or that it will continue to be accurate in the future. No one should act onsuch information without appropriate professional advice after a thorough examination of theparticular situation.