The rising cost of social responsibility

Responsible gambling initiatives such as time-outs and exclusions have hit 2016 forecasts for operators such as William Hill to the tune of £20-25m. Chris Elliott looks at why they are having such a dramatic impact and the potential effect they could have on the wider sector.

William Hill issued a profit warning on 23 March 2016, reducing operating profit expectations for 2016 to £260-280m (down from £291m in 2015). A poor Cheltenham festival was flagged as an issue.

However, William Hill also cited the greater the use of time-outs and self-exclusions as being more pronounced than expected, especially in gaming, which was estimated as costing the company £20-25m. WH's shares dropped by 11% on the day. 

It’s worth pausing to consider just how significant those numbers are. A cost of £20-25m is approximately 7-8% of the company’s operating profit. The new responsible gambling initiatives were expected to impact operators' margins, but few would have predicted quite how dramatic this profit warning suggests them to be.

It is a significant financial hit, and has forced British-licensed gambling operators to take note of the potential cost of British responsible gambling tools. 

What is self-exclusion?
The requirement to offer facilities to allow customers to self-exclude is not new, having been a condition of holding a British licence since 2007. 

The tool allows those that wish to stop gambling for a significant period of time to have access to their gambling account blocked by the operator for an agreed period (minimum six months). During such time, the player cannot be marketed to, nor can they request to have the account reopened.

It is a significant step, and one which is a clear indicator that a player has trouble with controlling their gambling. The tool is widely considered an important harm minimisation tool, and should be seen as a form of protection mechanism invoked by people who have reached the point at which they consider that other mechanisms that fall short of withdrawing from gambling altogether are ineffective. 

What has changed?
As part of its wide-ranging review of social responsibility in gambling in 2014/15, the Gambling Commission (the “Commission”) identified there being a number of factors which limited the effectiveness of self-exclusion as a harm minimisation tool:

1. the requirement for players to self-exclude by phoning customer services may cause embarrassment, thereby acting as a disincentive;
2. the finality of withdrawing altogether, coupled with a lengthy minimum exclusion period, may put off an individual from opting to use the tool; and
3. the ease with which a player can continue to gamble with other operators. Currently, if an individual wishes to self-exclude entirely from gambling online, they need to do so separately with each of the operators they gamble with.

The Commission sought to address each of these limitations through a number of social responsibility changes. 

As regards to number (1) above, in an attempt to remove this barrier, the Commission now requires operators to offer an ability to self-exclude via an automated process, without the need to contact customer services (previously this was not mandated, but encouraged as good practice).

At the time the Commission consulted the industry on the proposal, few suggested that this would dramatically inflate the number of people opting to self-exclude, not least because a number of operators already offered the automated self-exclusion option.

A more significant development, at least in terms of its cost to operators, was the introduction of time-outs, which operators have been required to offer since 31 October 2015.

What are time-outs?
Recognising the potential for a long minimum duration to act as a barrier to the take-up of self-exclusion for those who may need it, the Commission introduced shorter exclusion periods, called ‘time-outs’, as a new gambling management tool.

Time-outs are intentionally different from self exclusion, and offer greater flexibility in their duration. Players are given the opportunity to take a break from gambling from between one day to six weeks, with the option of extending this period indefinitely if they so wish.

It was the Commission’s intention that this flexibility would increase uptake and the range of gamblers willing to consider taking a break as an option for controlling their gambling and avoiding harm. The number of people opting to time-out would certainly suggest the Commission has achieved its aim.

William Hill estimates that approximately 3,000 accounts per week have been opting to request a time-out, clearly higher than expected.

Too customer-friendly?
Has the Commission been too heavy handed in introducing such a costly regulatory requirement? Some may see it that way.

Critics will complain that the regulations make it too easy for punters to block access to accounts in the heat of the moment or when frustrated by losing wagers; and not, as is their intention, because players perceive a difficulty in controlling the level of time or money spent gambling.

There may be some truth in this. A balance clearly needs to be drawn between promoting these schemes so that customers who may benefit are made aware of the facilities, and the commercial implications such regulations have on the continuing viability of British regulated gambling businesses.

Has Britain suddenly developed a marked increase in the number of people with a problem in gambling? The latest industry figures suggest otherwise; the number of problem gamblers and those 'at-risk' has remained relatively stable.

That's not to say that the static minority who do struggle with controlling their gambling shouldn't be given more effective means to do so.

The apparent increase in use of gambling management tools likely reflects that potential problem gamblers who were previously deterred from using such tools have seen them made more visible, more accessible, and more straightforward to use. 

The take up of time-outs might be one indicator of a potential problem, or a customer might just find it a helpful tool to appropriately manage their gambling.

An operator would not be able to determine this from the take-up of time-outs in isolation but, together with other relevant information, it should help inform staff whether there is a need to interact. The tools are there to empower players to manage their own gambling.

Those who argue against their introduction face a difficult task of convincing the regulator, and the public, that operators are better placed to tell when someone has an issue with controlling their gambling than the players themselves.

Just William Hill?
In an attempt to explain why it seems to have been hit harder than its rivals, William Hill explained that it has seen an unexpected take-up of self-exclusions and time-outs by its 'higher value' or VIP customers.

The issue of VIPs and social responsibility continues to be area of scrutiny in the industry; the Commission has highlighted a trend for VIP customers being insulated from the social responsibility obligations applying elsewhere in operators' businesses.

The concern is that operators have historically been reluctant to interact with commercially valuable customers on social responsibility grounds for fear of losing them to competitors. The apparent uptake in use of 'automated' self-exclusion and time-out tools amongst operators' VIP customers may serve to substantiate these concerns.

It's worth remembering that 85% of William Hill's online business is taken from the UK , a significantly higher proportion than a number of its major competitors. As a result, self-exclusion and time-out tools must be made available to most of its customer base. 

Whilst some operators introduce social responsibility tools on a global basis, applying a 'highest common denominator' approach to regulatory requirements (i.e. to ensure that a single online gambling offering meets the standards required in all jurisdictions in which a licence is held), not all do.

Britain is widely considered to impose one of the highest regulatory standards in the world.

William Hill's profit warning may prompt operators to re-think their regulated market strategies and ask the question as to whether there is 'value' in segregating regulated markets such that online gambling offered in reliance on a Maltese, Spanish or Italian licence (for example) does not necessarily need to meet the standards imposed on its British offering.

This poses difficult moral questions too, and challenges executives as to the types of businesses they intend to run. Choosing not to offer social responsibility tools to customers outside of Britain because 'it is too expensive' or because 'we are not required to' should be a difficult decision to take, but in a fiercely competitive market, the temptation is there.

More to come
The emphasis on alleviating problem-gambling related harm in Britain looks set to continue. 

In April 2016, the Responsible Gambling Strategy Board (RGSB) released 12 “priority actions” for the next three years , which include self-exclusion, better research and increased understanding of gambling-related harm and harm-minimisation pilots.

From 30 April 2016, online casino operators will be required to offer reality checks to British players. “Reality checks” allow players to set regular prompts telling them how long they have been playing, a link to their account history and the option to end their gaming session. 

In addition, new auto-play controls are introduced which (among other things) require players to pre-select a loss limit, again with the intention of allowing customers to stay in control of their gambling.

The Commission is also committed to requiring all British operators to participate in a national self-exclusion scheme. The intention is that, once implemented, customers will be able to self-exclude in one place from all online gambling legally offered to British consumers (this scheme is already in place for the British retail industry).

This would tackle the major limitation of the online self-exclusion tool, being the ease with which a player can go and play at other sites. The online scheme faces a number of practical challenges, but removing this limitation will do much to increase the effectiveness of self-exclusion as a key harm minimisation tool.

It is currently anticipated that the online scheme will not be introduced until the end of 2017, at the earliest. William Hill's profit warning highlights the potential financial impact social responsibility measures may have. 

The Commission's continued focus on making sure social responsibility lies “at the heart of every gambling business”  may well come at a cost. Whether other UK operators will face a similar regulatory hit remains to be seen. 

Chris Eliott is an associate at Wiggin LLP.