Brexit: What does the future hold for the UK gambling industry

Perhaps the first thing that I need to be honest about is that I have been wrong so far. My own prediction was that the result would be 54:46 in favour of staying, and I said as much to colleagues, taxi drivers and anyone else who would listen.

As it turned out, I suspect that the majority of readers also got it wrong. I am guessing that the majority of you are lawyers, commentators and executives in the gambling industry. We tend to be the kind of liberal, intellectual and essentially middle class individuals who live in big cities, see the benefits of Europe and voted “remain”. Indeed, it appears that, right up to the line, bookmakers thought that Britain would vote to remain in the EU. And we all got that judgement call badly wrong.

So when being asked to assess the potential effect of the referendum decision we need to consider very carefully whether we should have very much confidence in our predictive abilities – and for two reasons: not only have we been proved fallible in relation to one important judgement (and are out of step with the numerical majority of the electorate) but, equally important, over the last few days the rule book by which we have made our legal and political predictions has been ripped up. There are very few safe assumptions.

Still, even if everything that we now say about the future must be ringed around with a very large measure of caution, our clients (internal or external) pay us to have a view and give the best counsel that we can. So are there any features of this new landscape that we can pick out and rely upon?

The first thing issue that I believe needs to be addressed is that of being in denial. Over the last days, I have seen a number of lawyers, civil servants and indeed politicians begin from the proposition that, despite the referendum result, Britain will not actually ever leave the EU. Being a member state of the EU has been a consistent norm for all of our professional careers (and in many cases for all of our lives) – and so it is very easy simply to refuse to see such a monumental change as possible (or to deny that it will end up being monumental). Some, therefore, have pointed to the need and desirability of a second referendum. Some have said that there will be a general election in the near future in which one or more parties will stand on an express agenda of keeping Britain within the EU and therefore providing a mandate to ignore the referendum result. Still others have pointed to referenda results which have in the past been ignored by governments (instances of which are not as uncommon as might be thought) and others have indicated that article 50 may never be triggered, or cannot be triggered without Parliamentary approval (itself a hurdle given that the majority of MPs do not support the Leave decision).

It is entirely legitimate to speculate about these possibilities. Whilst each of them may seem to be unlikely, we are living in a period of such political novelty that none of them should be dismissed out of hand. However, it is equally important that we do not continue to operate on the basis that Brexit is a mirage which will disappear as we get nearer to it. We must accept that it is very likely that a Brexit will happen and that the UK will spend at least a period as a “third country” sometime in the next 12 -24 months.

Article 50 does provide for a limited degree of negotiation between the leaving state and the European Council. However, the purpose of this negotiation is fairly clear on the face of the article to be limited to practical issues arising out of the decision to leave (for example the settling up of balances in relation to budgetary contributions and the relocation of nationals) – it is not suggested to be a basis for negotiating a new trading arrangement. The reason that this is important is that acceptance of the terms of exit under Article 50 can be approved by a qualified majority of member states. By contrast, the negotiation of any trading relationship between the EU and a “third country” (as the UK would necessarily be following termination of its membership of the EU), can only be finalised by unanimous agreement of all 27 remaining EU member states. Therefore whatever the extent of any informal or formal negotiations that take place between the UK government and the other EU heads of state, there can be no agreement on a subsequent trading arrangement without full approval of all members. That rule means that the potential for one or more states to hold up the conclusion of any new trading relationship (as has notably been the case in trade agreements with other third countries such as Canada) is a very real one. Why should a struggling economy allow one of the big players to have an easy ride, when this is precisely the time to exert positive influence on their own position in Europe?

As to the outcome of negotiations, there is of course a spectrum of potential models with, at one end of the scale, Britain taking up membership of EFTA and becoming a part of the EEA to, at the other, simply relying upon the principles set out in World Trade Organisation Agreements. All such arrangements are going to take time to negotiate and it is clear that despite moves to get back to a “new normal” we will no doubt see the effects of that prolonged uncertainty in terms of injury to the British economy in the years to come.

Assessing the impact of Brexit on the gambling industry is inherently complex, but perhaps a convenient way of dividing up the problem is to think of gambling as operating in three different legal spheres of activity – (i) as a form of commerce, (ii) as a matter for regulation and (iii) (potentially) as a matter impacting on the criminal law.

Gambling as a form of commerce

Beginning from first principles, the provision of gambling is a service like any other and, falls within the ambit of the free movement and freedom of establishment principles. However, gambling has never enjoyed the same degree of free movement as other services and even following reforms over the last decade, it still remains a matter which is largely idiosyncratic on a national basis.

In days gone by, almost all EU member states invoked the rights to derogate from the principle of free movement on the grounds that the imposition of a national regime was permitted as being necessary and proportionate protect the local public from crime, immorality and disorder. Over the course of the last 15 years, those regimes (often protecting state-owned gambling interests) were the subject of a series of References from the European Commission and challenges before the European Court which, little by little, have obliged the governments of Italy, France, Spain and others to adopt systems for national licensing structures which at least allowed operators from other EEA states to participate in the marketplace, albeit under a national licensing structure.

Indeed, in terms of upholding the free movement principle Britain has, until recently, been a “good European”. The Gambling Act 2005 originally permitted gambling services to be provided to UK citizens by any operator licensed within the EEA, and not based upon adherence to a specifically UK  regulatory structure or tax regime. That liberal stance was reversed with the passing of the Gambling (Licensing and Advertising) Act in November 2014, which required all those who wished to operate from or have access to the UK market to hold a UK operating licence. To that extent, the decision of the UK to “row back” from free movement reflected the fact that it had become clear that the European Commission was prepared to tolerate the somewhat “nationalistic” approach adopted by countries like France and Italy.

And so the European gambling marketplace has settled upon a form of stability which was essentially national in its approach if at least a good deal more open than had previously been the case. How might that change following a Brexit? Well, as ever, it is very difficult to predict a long term trend, but the overall direction of travel appears to be towards the acceptance of greater leniency towards different national models and away from further harmonisation. The prospect of a “European Directive on Gambling”, if they were ever possible, seem to be much less likely.

Regulation

Moves towards closer harmonisation in the field of gambling were restricted to the principles of “enhanced co-operation”, which has found its most complete voice to date in the Co-operation Arrangement between Gambling Regulatory Authorities of EEA Member States signed in November 2015, (and to which the UK’s Gambling Commission was, of course, a signatory). Technically, if the UK leaves the EU, then its right to be a signatory of the Co-operation Agreement might be called into question but it seems unlikely that the other parties would object to the UK continuing to be part of the arrangement, provided that the structure of UK regulation provides equivalent protections and oversight to the regime currently in force. That last sentence in fact provides a neat encapsulation of a central dilemma arising from Brexit which was never given enough voice during the course of the Referendum debate.  Britain may wish to have “greater control” in relation to creating its own legislation, but if it decides to move away from the levels and standards of equivalent EU legislation, it may well reap the detriment of no longer being able to participate in trading arrangements with EU member states in a way that would be so damaging, that Britain will be forced as a matter of practicality to adopt and maintain legislation which is essentially identical to the provisions of EU law from time to time.

As one example, take data protection – clearly a regulatory matter of crucial importance to gambling operators. The UK has had a data protection regime since 1984 and its current legislation   (the 1998 Act) is an implementation of the Data Protection Directive. Recently, the Fourth General Data Protection Regulation was passed and adopted by member states, becoming directly effective from April 2016 but with a timetable for implementation giving member states 2 years to comply. Once Britain is outside the EU it would of course be entirely within the power of the British Parliament not to implement the new law and to take a different path. But would it really be feasible or sensible to have a data protection regime within the UK that diverged to any material extent from that in place across the EU from time to time? After all, once Britain is outside the EU (and the EEA), then data transfers from EEA member states to the UK will only be permitted  as a matter of law where the data subject has given express consent, or where the UK has been approved by the European Commission under Article 25 of the Data Protection Directive as providing adequate protection for data subjects. Whilst such an approval might seem a formality now, it will presumably be based upon the premise that the UK has in place and maintains legislation precisely equivalent to that set out in the Fourth Data Protection Regulation.  In other words, in very large areas of regulation, it will be practically impossible for the British Government to do anything other than accept and implement legislation mirroring very closely the EU position.

A similar position applies in relation to Money Laundering legislation although, in relation to Money Laundering, it is the Financial Action Task Force, (the international body which recommends money Laundering practice and standards) which will continue effectively to dictate UK Money Laundering policy whether or not Britain is part of the EU.

Criminal Law

Whilst crime is not something that readily springs to mind when considering the EU, in fact there are five areas in which criminal law may form part of the EU legislative and organisational framework:

• Definition of particular criminal offences;
• Mutual recognition and co-operation between member states (e.g. assisting with evidence gathering, or seeking the hand-over of a fugitive from justice);
• Harmonisation of criminal procedure;
• Exchange of intelligence on criminal activities; and
• EU policing agencies.

As to these, the UK has already opted out of almost all of the definitions of criminal law potentially available, (including those relating to fraud and organised crime) but has adopted definitions in relation to attacks on information systems. Also, presently Britain has engaged in mutual recognition of criminal matters, investigations and the European Arrest Warrant (famously used in relation to Unibet’s CEO Petter Nylander), freezing orders and confiscation of assets. Finally, as regards policing agencies, Britain participates in Europol. Once Britain exits from the EU, it may fall back upon various Treaties organised through  the Council of Europe (which already include non-EU members such as Turkey and Russia) but these are currently not ratified by a number of EU states and generally provide a much less clear framework for mutual recognition. Further, there is no Council of Europe Treaty in relation to a number of important matters such as the exchange of criminal records –  the UK Government is one of the biggest users of the records checks in relation to foreign nationals under the current EU system, to which it will not be entitled once it leaves the Union. Of course there may be attempts to create bilateral arrangements between the EU and the Britain in this field, but the general trend, at least for the foreseeable future is that there will be a markedly lower level of information exchange and co-operation in relation to such matters.

Other areas

Finally, it goes without saying that gambling businesses are, of course, part of the overall economy and will be affected by all of the uncertainties and changes that affect commercial performance. Certainly, the international operators will be influenced by currency fluctuations and the ability to hire and retain staff with the correct skills – and no doubt there will be a healthy debate about whether Brexit will lead to a liberalisation of the labour market or a skills shortage. Another area that I think worth highlighting is intellectual property. Gambling businesses rely more than many others on data, software, brands and confidential information and trade secrets as important assets in their businesses. The legal protection of intellectual property is one of the more harmonised areas of EU law. We have been filing Community Trade marks (now EU Trade marks) sine 1996, and they have completely eclipsed UK trade marks as the favoured means of brand protection. We also have a Community registered and unregistered design, a European wide database right and are in the process of establishing a Unitary patent system. To complete the picture, the EU adopted a new Directive on the Protection of Trade Secrets on 27 May 2016. Many of these protections will simply cease to apply in Britain once it is outside the EU – and neither a bilateral agreement nor membership of the EEA would be sufficient to render the assets valid or operative within the EU. New strategies for protection will have to be devised by operators to ensure that they can continue to protect their innovation and identity.

In a short article, it is only possible to touch very lightly on a few of the implications of Brexit on the gambling industry. One might be tempted to say that given the degree to which national law in member states controls gambling legislation is likely to mean that the effects will be limited – operators are used to having to seek a licence in each European state in which they intend to do business. So in reality, the change will not lie there. But Gambling businesses are very much part of the new era – the era that seeks to exploit intangible assets, data, human talent and international communication and, for that reason, it may well find that it faces many challenges in an environment in which barriers to such movement are being raised, not diminished. However, over all I remain optimistic – and the reason? Not at all because Brexit offers advantages; it most certainly does not. Instead, it is because online gambling businesses have grown and thrived in difficult circumstances, exploiting technology and imagination to deliver their services in sometimes quite hostile environments – and so they know how to push past difficulties and adapt.