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Dear Chair... - January 2011

Dear Chair...

Towards the end of last year the Government advertised for a new Chair of the Gambling Commission. The advertisement made it clear that the eventual appointee will be expected to focus on the planned merger of the Commission with the National Lottery Commission. Steve Donoughue and Fabian Adams-Sandiford suggest that there are other equally pressing matters that also require their attention.

The Gambling Commission celebrated its fifth birthday last October, and is entitled to be proud of much of what it has achieved in its short life. It has managed effectively a potentially fraught relocation from London to Birmingham (and in doing so became one of the first public bodies to implement the recommendations of the Lyons Review). It has successfully recruited and trained an almost entirely new staff team. It has completed the mammoth task of licensing the industry from scratch (for the record, more than 4000 operating licences and more than 1000 personal licences in 2007/08). It has, for the most part, built effective working relationships with the industry, including those previously unregulated operators who initially viewed the Commission with suspicion. And it achieved much of this while at the eye of a tabloid storm about the new permissive legislation and about so-called ‘Super Casinos’. The Gambling Commission and its staff have not been congratulated enough for this (not least by the industry), you will want to acknowledge their past success.
However, as the Commission moves to consolidate these achievements, there is growing concern within the industry about aspects of its work. You, Chair, must address these either as the Commission merges with the National Lottery Commission or – preferably – before that merger takes place.

Regulatory Approach

The Gambling Commission professes to take a risk-based approach to its compliance activities. Its most recent policy statement on the matter states that:

“The Commission’s risk methodology is applied in order to establish a regulatory risk rating for licence holders. This informs the level and nature of regulatory engagement by the Commission with operators[i].”

However, this is not immediately obvious from the Commission’s own figures on compliance visits. According to those figures, in 2009/10 the Commission conducted:

  • 254 compliance visits to casinos (1.75 visits per casino[ii])
  • 326 compliance visits to bingo clubs (0.5 visits per bingo club)
  • 1153 compliance visits to betting shops (0.13 visits per betting shop)
  • 683 compliance visits to machine gaming centres (0.66 visits per gaming centre)
To the industry this suggests a curious approach to risk and some odd beliefs about gambling. For example, even if one accepts that casinos are the hardest end of the gambling spectrum and thus potentially represent the greatest risk to the licensing objectives, it is difficult to accept that that risk is 10 times greater than that represented by betting shops. It further strains credulity to believe that bingo clubs – of all things – represent a risk to the licensing objectives three times greater than that of betting shops!

The Commission’s approach to risk-based regulation has been under the spotlight before. In 2008 the National Audit Office reviewed the Commission’s performance against regulatory principles set out the Hampton and Macrory reports. When it looked at its use of risk analysis, the Review Team “was not convinced that resources were not always allocated accordingly in some other cases including inspection activity... and recommended that more work be undertaken in this area. Analysis of the data indicates that this problem has not been resolved and that it needs to be revisited again. Until this happens it will be hard for the industry not to conclude that some operators are being properly regulated while others are instead being policed.

Staffing

Clearly, the fact that the Commission now regulates significantly more of the industry than its predecessor makes it difficult to make direct comparisons between the two organisations’ staff numbers. However, many in the industry wonder why – given the new risk-based regulatory approach – the Commission needs almost three times as many employees as the Gaming Board for Great Britain (GBGB). For example, why are twice as many compliance staff (62 versus 35) now required by the Commission to conduct half the number of inspections undertaken by GBGB (2,471 in 2009/10 versus 5,255 in 2005/06)?

The picture is equally unclear when it comes to back office staff. The Commission has a standing Policy and Research team of 16[iii], and yet it is not immediately evident to outsiders that this much capacity is needed in-house. Most organisations would require a substantial rolling programme of policy and research to justify these numbers. Similarly, the Commission maintains an ICT team of 11. Doubtless ICT is critical to the delivery of the Commission’s core functions, but again outsiders might wonder whether – in an age of outsourcing – this level of in-house resource is essential... particularly in light of the Commission’s financial position.

Financial Management

The area of greatest concern is the Commission’s financial management. Since its creation the Commission’s income and expenditure account hasalways been in deficit. An analysis of the accounts indicates that the Commission’s average fee income of £12.2 million per year has been exceeded by average costs of more than £15 million per year.
Clearly, the transition from the Gaming Board for Great Britain to the Gambling Commission meant that the Commission incurred exceptional one-off costs. And the Commission has whittled away it its annual deficits so that they were only £871,000 as at 31 March 2010. Staff costs have been reduced by around £340,000 and other operating costs by £2.75 million since 2008. However, it is worrying that, as the Commission enters its sixth year, it is still appears to be unable to balance its books. Reducing costs further should mean taking some difficult decisions. If the current year’s deficit was split equally between staff and operating costs, it would mean a reduction of 9% of staff and 21% of operating costs just to break even. The fear within the industry is that the Commission may be tempted to seek an easier way out by raising fees.

The Commission is undoubtedly already considering the issues raised here, but it is open to question whether it will be able to resolve them without outside support. The Management Agreement between the Gambling Commission and the Department for Culture, Media and Sport provides the perfect mechanism for bringing in such support. It states that:

“The Commission’s effectiveness will be reviewed periodically, in accordance with the business needs of the DCMS and the Commission, and in accordance with Cabinet Office guidance[iv].”

The period for such reviews used to be five years, but this has since been superseded by a requirement for “reviews... be carried out with sufficient frequency to give the department confidence that the NDPB is delivering high quality services, efficiently and effectively and fits appropriately into the department’s overall delivery structure[v].” On appointment, you, Chair, should ask the Department to invoke the review clause and to appoint an independent reviewer to investigate the Commission’s performance, organisation and management and to make recommendations on how they might be improved before the merger with the NLC.

© Steve Donoughue, Fabian Adams-Sandiford - 2011

References

  1. Licensing, compliance and enforcement policy statement – September 2009 – Gambling Commission, 2009
  2. Gambling Commission Annual Report 2009/10
  3. Gambling Commission Annual Report 2009/10
  4. Corporate Governance Framework, September 2010 – Gambling Commission, 2010
  5. Chapter 9, Reviewing Public Bodies, Public Bodies: A Guide for Departments – Cabinet Office, 2009