Changing face of reform

Since coming into force in September 2007, UK’s Gambling Act has given…and taken away

The 2005 Gambling Act came into force in September 2007 and therefore has been in place for over a year. Now would seem an appropriate time to review its impact on the UK gambling sector in general and the casino sector in particular.

The Act came after several years of consultation with various interested parties and followed the publication early in the decade of a report headed by economist and banker Sir Alan Budd which contained 175 recommendations for reforming Britain’s 40-year-old gambling laws. Many of the recommendations were finally incorporated into the Act.

The main change was the creation of the UK Gambling Commission to oversee the regulation of all gambling. The commission is paid for by the industry. The Act also allowed for the expansion of the casino industry by creating a “regional casino”, as it was officially known (or a “super casino”, as it came to be called), which would contain up to 1,250 unlimited-prize casino-style slot machines, and 16 new smaller casinos.

However, the super casino, which finally was designated for Manchester, was voted down in the House of Lords in the spring of 2007 and dropped by the new Labour Government of Gordon Brown that summer. It was a disappointment for the city of Manchester. But it also raised questions about other provisions of the Act and Government policy. Specifically, because the super casino was considered an experiment, a brake was put on further new licenses so that its impact could be viewed in isolation. Some now argue that the absence of the super casino removes the need to inhibit growth in the sector. But such is the state of the UK casino market at present that even if the industry were allowed to expand it is doubtful that it would want to. In fact, since the Act came into force, nine casinos have closed, and there are doubts about the openings of some of the 16 smaller casinos. The closures and the absence of new openings are considered visible signs of an industry in serious decline.

However, the current malaise in the sector is not just an unintended consequence of the Act but the result of a combination of factors, some of which have been exacerbated by the Act. For example, the downturn in consumer spending would have affected casinos irrespective of the regulatory framework in which they operate. But the granting of new licenses in places where casinos already exist can only have an adverse affect on those existing casinos.

The British Casino Association, which represents around 75 percent of UK operators, including Rank’s Grosvenor Casinos, Genting Stanley and London Clubs International, says there are four main reasons for the industry’s problems: the licensing regime, tax increases in the last budget, the nationwide smoking ban and the removal of Section 21 machines from casinos.

The BCA argues that new license holders will enjoy “inherent commercial advantages over current licences in terms of greater machine numbers, sports betting and, in the case of the eight ‘large’ casinos, bingo.” The BCA says it is in favor of growth in the sector, but it shouldn’t be achieved in a way “that prejudices the commercial viability of the existing casino estate.”

Then there is the tax issue. In his March 2007 budget, then-Chancellor Gordon Brown abolished the 2.5 percent and 12.5 percent rates, assessed smaller casinos and replaced them with a flat bottom rate of 15 percent. That equates to an average additional annual tax bill of £200,000, with some casinos paying considerably more. There was also the introduction of a new 50 percent top rate on casinos with annual revenues of more than £10 million, which has not only impacted larger casinos but possibly has deterred operators from taking up new licenses.

Analysts at Panmure Gordon said after the budget was passed: “The increased level of duty will probably cause some small marginal casinos to close. In addition, some planned new casinos are not likely to be built now.”

The removal of Section 21 machines and the introduction of the smoking ban in July 2007 have seriously impacted both the casino and bingo sectors and have been disastrous for Rank, which operates in both. Gala Coral also operates casinos and bingo halls but has a large betting shop estate and has benefitted there from the proliferation of fixed odds betting terminals, which have been offering £500 jackpots since the Act came into force. Some casino operators believe they are losing machine players to the betting shops and they are lobbying for either FOBTs or the return of Section 21 machines.

The BCA also wants Government to allow casinos licensed under the old 1968 Gaming Act to be transferable between local authorities. This, they argue, would allow operators flexibility without increasing the total number of licenses. Currently, if a casino is losing money the operator will close it down. The operator can apply for a new license elsewhere, but that is a slow process and uncertain.

The association met with Government last July, and it was agreed that the situation would be reviewed in six months. The BCA also won a review of the machine rules. Government, in the meantime, is reviewing the impact of FOBTs in betting shops.

Lawyer Richard Jukes, an advisor to the BCA, said that although the industry was “having a torrid time” he was hopeful that Government would listen to the industry and act appropriately. “We enjoy a good relationship with Government and are engaged in a close dialogue. However, the difficulties we face are very real and very marked, and we will continue to lobby for changes to taxation, which the industry cannot currently sustain.”

There is also talk of consolidation and mergers. Harrah’s Entertainment, which paid around £300 million for London Clubs in 2006, is reported to have been in talks with Rank and Gala about selling LCI. However, neither Rank nor Gala would appear to be in a position to expand their operations through acquisitions at present. Rank announced that in the first six months of 2008 revenues fell to £275 million from £285 million in the same period the previous year, while operating profit fell from £47.9 million to £28.9 million.

Gala Coral operates 28 casinos and 156 bingo halls and more than 1,600 betting shops. The company is not listed so is not required to publish results, but the private equity owners have admitted that they invested an extra £125 million into the business last April amid fears that it was on the verge of defaulting on its banking covenants.

Another major operator is Genting, which operates 46 casinos under the Genting Stanley brand. Genting’s head of strategic investments and corporate affairs, Justin Leong Ming Loong, has said: “We take the view that things are going to get worse before they get better in the UK. In the UK you get periods of respite before things get worse again, and we are battening down the hatches.”

In the short term there is unlikely to be any significant increase in the 144 casinos currently operating in the UK. Indeed, there is more likely to be a decrease.

As for the Gambling Act, it was conceived during a period of economic growth and massive increases in gambling turnover. Only if and when the economy recovers and the sector begins to thrive again will it be possible to pass final judgment on it.

Reprinted with permission from International Gaming and Wagering Business (IGWB) magazine.
Simon Banks is a freelance writer specializing in the sports and gambling industries. He is based in London.