It’s been a while since I’ve written about FI. There have been developments, although not necessarily much we can do anything about. And I try to only comment when I think I have something worth saying.
Today we will focus on the role of the Gambling Commission. We are fortunate to have help here from David Clifton, an expert in betting licensing who has generously given up his free time to answer some community questions.
But first, a few of my thoughts on the overall situation.
FI In the Headlines
In recent weeks, we’ve only really been able to watch and wait. The next major step should be the administrators bringing forth a Company Voluntary Agreement. That should happen within weeks.
How generous this offer is will be telling. Is it a serious attempt to reboot the company? This will likely have to be generous as they’ll need to buy significant goodwill. Or is it an obligatory step where they expect creditors to vote down a poor offer, just so it looks like they tried?
We’ll find out soon enough, and I’ll definitely be swift to comment on that!
The FI story had it’s moments in the headlines, but the heat has largely faded away by now as journalists move onto more pressing matters for them.
Whilst I’ve been relatively quiet on FI recently, I don’t think it’s a secret that I’ve been frustrated with the standard of journalism we’ve seen even from what should be reputable sources.
I’m particularly uncomfortable with the portrayal of many FI users as hapless fools, totally oblivious to the risks they were taking in pursuit of the rewards on offer. That just isn’t my experience of the people who used this platform.
I know this community is full of intelligent individuals who were well aware that things might go wrong – many of us have been discussing the stability of the business model for years both in the good times and the bad.
And we will need to see more from the administrators on that business model as part of the CVA. To read the media reporting, you’d be forgiven for thinking the book has been open and shut on whether the FI model was ever viable. Or whether it was run into the ground by a lethal combination of bad luck and incompetence (mainly incompetence, I suspect).
All of that remains an open question and the primary source pointing to FI being fundamentally unworkable is a skilful yet flawed takedown of FI by a small rival company. This same source was cited by most journalists as the smoking gun sent to the Gambling Commission over a year ago.
Most journalists framed it as some form of independent expert review into the company – when they knew full well that it wasn’t. Disappointingly, the aim of most reporting I read seemed to be much more about sensationalism and clickbait than it was about accuracy or helping FI users.
Very few people really know what went on under the bonnet of FI, but I think we can be sure that serious operators like Begbies will not try to pass on a company that is fundamentally unsound. So I will be reserving judgement on that issue until we hear more from them.
Role of the Gambling Commission
Another issue that has blown up is the role of the Gambling Commission, a long time target of anti-gambling lobbyists who want to see it strengthened (Something I think many of us support in principle, though personally I don’t want anything that is needlessly detrimental to people who enjoy betting responsibly).
And for the lobbyists and anti-gambling politicians, the FI debacle is perfectly timed. FI is now the stick with which to beat the GC during the Government review into Gambling regulation. And some have even been suggesting that the incompetence of the GC is grounds for Government compensation to FI users.
I wanted to find out more about this issue. Sadly, much of the press reporting we have seen often fundamentally misunderstands the actual role of the Gambling Commission. And that’s going to lead to many of us in the community misunderstanding it too.
So I sought help from David Clifton of Clifton Davies Consultancy, a widely recognised expert in UK gambling law and regulation. I had read his excellent recent article in which he discusses the Football Index and the recent departure of the GC’s CEO, which may or may not be related.
Following that, I got in touch with him to see if he would answer some community questions. He very generously gave up his free time over the bank holiday weekend to provide some very detailed answers to my questions, which FI Twitter helped inspire.
I’m hugely appreciative that David helped us out here as I couldn’t offer him anything in return except the chance to give some clarity to a community in no small amount of distress.
Below are my questions and David’s full answers. They are really comprehensive and whilst this article is a long read – his answers are extremely useful if seeking a proper understanding of the role of the GC in regulating the Football Index.
1. We’ve read a lot about the role of the Gambling Commission in the Football Index debacle. As a licensing expert, can you help us understand the extent to which the GC are responsible for monitoring the on-going financial health of a licence holder?
David: Once an operator has been licensed (as Football Index was in September 2015), the GC’s regulatory obligations under the Gambling Act 2005 do not include monitoring the ongoing financial health of its licence-holders.
Indeed, in its Licensing, Compliance & Enforcement Policy Statement, it makes it clear that: “the Commission does not purport to assess, on an ongoing basis, an operator’s solvency; the Commission is principally interested in financial stresses that might lead to an increased likelihood of compliance failures”.
Even at the earlier stage of considering whether to grant a licence, the GC’s focus from a financial perspective is principally directed at the resources that will be devoted to the gambling operation and the degree to which the operator will be enabled to deliver the necessary arrangements to ensure compliance with the 2005 Act.
It is with that compliance-focused concern in mind that the GC’s Licence Conditions and Codes of Practice (“LCCP”) require licensees to:
- notify the GC of certain prescribed indicators that could potentially point to mounting financial problems,
- hold customer funds in a separate account from their business account and;
- disclose to customers what level of protection of customer funds is provided in the event of the operator’s insolvency.
In that last respect, the Football Index Terms of Use referred to the operator (BetIndex Limited) providing ‘medium protection’ of customer funds.
By that, it meant that (a) customer funds were kept in accounts separate from the operator’s business accounts and (b) arrangements had been made to ensure that assets in the separate customer accounts would be distributed to customers in the event of insolvency.
However, as those Terms of Use made clear, this provided “no guarantee that all funds will be repaid in the event of insolvency” and BetIndex went on to warn customers that “once you have purchased Shares, the applicable value of your Shares have been ‘wagered’ and are not stored in any account or otherwise protected as they are sums at risk”.
2. Should the GC have warned us that they were investigating FI from May 2020? The GC’s explanation was that they did not want to take steps that would trigger the financial decline of the operator and therefore took “steps short of suspension” behind the scenes. Is this reasonable?
David: I understand why this question is raised, particularly because the GC has for many years taken pride in placing the consumer at the heart of gambling regulation. In retrospect, it is easy to say that something more should have been done to alert Football Index customers at an earlier stage, but one has to take into account the statutory framework within which the GC presently regulates the industry, as I explain below.
Once an operator holds a licence, the GC seeks to ensure, through the conduct of compliance assessments, that the licensee remains suitable to hold its licence and that it conducts itself in a way that is consistent with the licensing objectives, the requirements of the Gambling Act 2005 and the conditions of its licences and the LCCP.
The GC is under no additional duty to make public announcements about either the outcome of those compliance assessments or any regulatory investigations that it is conducting, whether they result in licence reviews (as occurred in the case of Football Index on 20 May 2020) or otherwise.
Instead, the GC’s Licensing, Compliance & Enforcement Policy Statement makes clear that, when making decisions on publicity in enforcement cases, the GC will “at all times bear in mind the public interest, as well as the rights of individuals to a fair hearing, and the right to privacy enshrined in Article 8 of the European Convention on Human Rights”.
As a result, the GC will only:
- announce publicly that it is investigating a matter “in exceptional circumstances” and
- release details of an investigation when it has determined it is in the public interest to do so on the ground that “this protects the integrity of investigations and protects individuals or operators from being unfairly associated with unsubstantiated allegations”.
Explaining this approach in its above-mentioned Policy Statement, the GC says it will only make such an announcement if it considers it is desirable to:
- maintain public confidence in the gambling industry or the regulation of that industry,
- protect players,
- prevent or deter widespread malpractice,
- help the investigation itself, for example by bringing forward witnesses or maintain the smooth operation of the gambling industry.
In the case of Football Index, we can only assume that the GC’s concerns about Football Index resulting in commencement of the licence review in May last year did not constitute ‘exceptional circumstances’ justifying an earlier detailed announcement than that published on 19 March this year when, in response to questions about its approach, it indicated that it had only decided to publish information about the background to its regulatory actions “due to the number of consumers interested in our investigation into BetIndex”.
It will be a matter for the forthcoming independent review into the collapse of Football Index to determine whether, on the basis of the full evidence made available to it, the GC acted reasonably in delaying announcing detailed information concerning its investigation of Football Index until after it had suspended the operator’s licence 10 months after that investigatory process had first been commenced.
In making that determination, the review will no doubt take into account the GC’s own reasoning on 19 March when it said:
“We know from experience that the suspension of a licence can, of itself, trigger or hasten the financial decline of an operator and put customer funds at risk. That is why we will always consider whether there are steps short of suspension that can still deliver the right regulatory outcomes and address the risks that consumers face without accelerating the financial collapse of a business. We will therefore only turn to suspension when that is the only option for delivering the right regulatory outcome and, indeed, the legislation requires us to exercise those powers in that way. We were satisfied that on 11 March suspension was the only regulatory option left available to us”.
3. There has been plenty of speculation in the press that the GC may have been negligent in their duties, with some arguing that they have been so incompetent that Government compensation is warranted. Does this route to redress feel viable? Are you aware of any precedent for such a scenario?
David: In summary, a claim in negligence against the GC would only stand a chance of success if it could be established that:
(a) a duty of care was owed by the regulatory body to customers of Football Index,
(b) the duty was breached,
(c) the customers’ losses were caused by the breach of duty, and
(d) those losses fell within the GC’s scope of duty and were a foreseeable consequence of that breach of duty.
In my opinion, those would be unachievably high legal hurdles for customers of Football Index to leap successfully in what I believe to be the unlikely event that any claim for negligence is mounted against the GC.
4. (a) Do you think the current licensing model overseen by the GC is fit for purpose to deal with complex products like the Football Index?
David: In theory, there is no reason why the licensing and regulatory framework set by the Gambling Act 2005 should not be sufficiently fit for purpose to deal with issues raised by complex business models such as that of Football Index, particularly when the regulator has access to external professional advisors.
However, as evidenced by the current DCMS consultation on increased GC fees from 1 October 2021, the GC has acknowledged it needs to recruit staff “with more specialist technical knowledge”.
In addition, the Government’s Review of the Gambling Act 2005 will no doubt be considering the same question you pose. In this respect, it’s worth noting that, when announcing the independent review into the collapse of Football Index, Minister for Gambling and Lotteries John Whittingdale said: “We are determined to ensure that regulators have the right tools to protect customers and to deal with novel products. The gambling landscape is evolving rapidly and so we are also taking action by reviewing the Gambling Act to make sure our laws are fit for the digital age.”
4. (b) A key difference is that unlike normal betting, it often requires large sums to be held for long periods of time. Are the traditional arrangements for protecting customer funds sufficient in this case?
David: I believe that the Government’s Review of the Gambling Act 2005 will include a particular focus on the circumstances surrounding the collapse of Football Index, and I won’t be surprised if this results in a tightening of restrictions requiring operators to provide greater customer funds protection in future.
Indeed, Tim Miller, Executive Director at the Commission delivered a conference speech on 30 March in which he confirmed that “in the coming business year” the Commission would be “looking at” the protection of customer funds “both from the perspective of our own rules but also to inform any advice we may give on the wider statutory framework, through the Gambling Act review”.
5. Many of us are confused by the GC’s statement that FI has “elements not considered gambling and therefore not subject to our regulatory remit”. Would you have any idea what elements they may be referring to? Would it be better for anything like FI to be treated as a financial product and regulated by the FSA instead? (Which was actually a long time goal of FI founder Adam Cole).
David: That is most certainly an intriguing comment by the GC. In an attempt to understand what it means, it might help to focus on the words that preceded the extract you have quoted. The full passage from the GC’s 19 March ‘update’ statement reads as follows:
“The current BetIndex product allows customers (called traders) to place bets (shares) on the future performance of footballers. A bet lasts for 3 years during which time they accrue dividends. After 3 years the bet expires meaning that customers lose their stake and any right to further dividends. The product evolved to enable customers to buy and sell bets with prices fluctuating according to demand. We have identified that the product contains elements that are betting in nature, and therefore regulated by us as gambling, as well as elements [sic] are not considered gambling and therefore not subject to our regulatory remit.”
On the bare information presently available, it appears that the GC may have been suggesting here that the Football Index ‘product’ had evolved over a period of time following the licence first being granted so that certain elements of it no longer constituted a gambling activity, raising the question whether those elements instead constituted an activity falling under the remit of a different regulator, possibly for example the Financial Conduct Authority.
That is not an unknown situation. For instance, dependent on the type of products offered, a business may need to be regulated by (a) the GC for those elements of its business that constitute betting under the Gambling Act 2005 and (b) the FCA for those elements that constitute spread betting.
It’s worth noting that:
- in its own website ‘strapline’, Football Index described itself as “a real money virtual stockmarket” but nevertheless thought fit to add that it was “a betting platform and should not be viewed as an investment vehicle”, and
- in its 19 March ‘update’ statement, the GC referred to the existence of “complex legal questions over the appropriate regulatory framework”.
It will be interesting to find out from the forthcoming independent review what were the conclusions of each of the “betting specialist expertise”, “Forensic Financial accountant” and “specialist external QC” examining those same questions during the course of the GC’s ten-month long review of the licence.
6. Looking ahead, how feasible might it be for a reformed BetIndex with new investment and leadership, or an established big betting company that takes over FI, to regain a licence to operate? Would the GC be likely to turn it away on principle after such a scandal, or would they take into account that a reformed company that offers redress may be in the best interests of customers?
David: In the usual manner, the GC would fulfil its licensing function in accordance with its statutory duty to permit gambling, insofar as it thinks it reasonably consistent with pursuit of the licensing objectives to do so.
As long as a new application passes that test and otherwise satisfies the GC’s assessment of the applicant’s suitability to carry out the gambling activities in question, I would not expect the GC to turn away another operator’s business proposition as ‘a matter of principle’, even if it bears some similarities with the Football Index business model.
However, to avoid a repeat of the Football Index controversy, I anticipate that any such similarities would be subjected to the most careful and rigorous scrutiny by the GC before any fresh licence was granted.
I would not expect the GC’s decision when considering a licence application for such an operator to be influenced in any way by considerations whether it would be in the best interests of consumers to licence another operator as the provider of a ‘replacement’ product for Football Index.
7. Do you have any views on what options for redress might be most likely or unlikely for customers, or are you aware of any precedents?
David: I am unaware of any precedent to the facts of this case. However, one of the key issues is whether the gambling activity that led to that loss of money was conducted fairly or unfairly, particularly bearing in mind that the second licensing objective under the Gambling Act 2005 is “ensuring that gambling is conducted in a fair and open way”.
Some clearly think that Football Index conducted its business unfairly. Examples include:
- Matt Zarb-Cousin, CEO of Clean-Up Gambling, who has described Football Index as “a company that has consistently misrepresented its product and misled the public regarding its sustainability”,
- Carolyn Harris, Chair of the Gambling Related Harm APP who has described the whole episode as “a scandal”, and
- whoever it was who told the Guardian that Football Index was “an exceptionally dangerous pyramid scheme under the guise of a ‘football stock market”.
Looking as dispassionately as possible at the contractual situation (as between Football Index and its customers), the GC’s LCCP requires that licensees’ terms and conditions must not be unfair under the Consumer Rights Act 2015 and that changes to those Ts&Cs must comply with the fairness and transparency requirements under that same legislation.
In fact, the Football Index Terms of Use did list in a clear manner a number of key risks that its customers would face when gambling. They included the following warnings:
- the Dividend Table would change from time to time,
- any change in the dividend was likely to impact share prices,
- the basis on which dividends were awarded might change,
- there was no guarantee of winning any particular amount of dividends in respect of bets and
- although reductions in the level of dividends was only permitted in January and June each year, the right to do so at other times was expressly reserved, including “in exceptional circumstances to protect [its] business”.
Football Index also appears to have given to its customers the required contractual advance notice of its dividend restructuring plan that was intended “to ensure the long-term sustainability of the platform”. Unfortunately, that advance notice had the very same detrimental impact on share prices that customers had been expressly warned about.
From a contractual perspective, whether or not customers of Football Index have any right to compensation for any losses in all of the above circumstances may be academic now that the business is in administration.
Different consequences may apply were it to transpire that any unlawful activity took place but that will remain a matter of pure conjecture until such time as more information is released, whether from the forthcoming independent review or otherwise.
Final Thought from Adam
Again, I’m really grateful to David for providing such comprehensive answers, he gave us far more than I was expecting!
I think the important thing is to be realistic about the options available to us from here.
Whilst some of the above is uncomfortable reading (such as the extent to which FI covered themselves in their terms and conditions) we need to know the facts before we can decide what the best course of action is.
The vast majority of press coverage thus far has given us a lot of heat and sensational accusations, but very little cool-headed analysis like David has given us here.
Unfortunately, cool-headed analysis is just not as exciting as talk of ponzi schemes and “porn king” swindlers. But it’s infinitely more useful to us.
My priority is simple – I want to see those who lost money when FI collapsed see as much of it back as possible.
That includes those who feel they have money still trapped in there, and those who felt pressured to sell for rock bottom following FI’s calamitous handling of their announcement.
I am very interested to see what Begbies Traynor come up with. We are yet to see their first major moves, but if they seem intent on securing a good outcome for customers then I’ll want to support them.
They have an excellent reputation, and have been perhaps surprisingly bullish about bringing forward a CVA coupled with a plan for continuing the business in some form. And have even said they are talking to new investors, an unexpected detail.
Resurrecting FI, or something like it, will be hard. I understand why some think it is impossible as things stand, with the press coverage it’s difficult to think anything else. But it is my view that if the willpower and the investment is there from the right people then things can start to look very different very quickly.
The CVA offer coming soon is pivotal. If it is a sufficiently generous, serious financial/shares offer supported by a credible future business plan then I suspect a lot of people would get behind it.
Any company hoping to continue is going to naturally provide a more generous deal than would otherwise be the case from liquidation. They’ll need to, if they seriously expect creditors to vote for it.
My personal hopes for Government compensation have been extremely slim, and narrowed further as I read David’s comments.
Whilst some have tried to convince us that the GC are responsible for our losses on the grounds of negligence, this argument seems to fall apart the moment you understand what the GC’s job actually is.
Under current arrangements, it was very specifically not the responsibility of the GC to monitor the financial health of FI.
We might think it should have been. And a good outcome of the Government review into gambling might be more robust oversight of products like FI, and I’d agree there.
But none of that is going to help those of us who lost this time.
And when it comes to legal action, I’m no lawyer. But it does seem that FI stitched up it’s Terms and Conditions to the point where it is very difficult to argue that changing the dividend table is unexpected or unfair in the legal definition of the word. We’ve known they could do that for years, experienced it for years, it was just always mostly in our favour.
As David says the crux of any legal challenge might be whether FI did not operate in a “fair and open way” in breach of the Gambling Act 2005. I think you can make very credible arguments that they were misleading – some of the marketing statements they made were needlessly provocative and reckless.
But then if you look at the small print on most of the official marketing materials it will still say all of the usual disclaimers about money being at risk. Whilst we might feel they behaved in a way that is morally unfair, it feels very difficult to prove that it was legally unfair as defined in the 2005 Act. And I wouldn’t look forward to trying, it sounds like a long and draining process.
That may turn out to be the only viable route for serious compensation so it could be worth trying anyway.
But in the first instance, I see no reason at all not to give Begbies Traynor a chance and to see what they come up with.
Anything offered and voluntary will be quicker and easier than anything anyone drags out of them by force. And I think the generosity of that offer, or lack thereof, will tell us a lot about how serious the efforts to revive the company are.
That will be fascinating because on the one hand, if Begbies promise us too much then they may struggle to get an investor to take on the business.
Yet if they give us a weak offer it may well get rejected (assuming that customers make up a significant percentage of the voting power, this is actually unknown).
There is also huge debate about how much exactly each of us are owed. Portfolio value pre-crash? Post-crash? Share purchase price? Initial deposits? This is a minefield.
Begbies have a balance to strike and it is not an easy one. Especially because at the same time, they need to pull out a credible narrative as to why the hell anyone should trust a reformed company to handle their money from here.
An uneviable task. But potentially a very rewarding one, if they can manage it. And if they present us with a serious offer and try to bring about a good outcome for those who lost, I’ll want to support them if the case for why a future company could be sustainable is a credible one.
If it becomes clear that the CVA is a box ticking exercise? That might be the time when more aggressive action might appeal more. But we would have to expect that to be a long and exhausting struggle.
But I’ll end more optimistically with the hope that Begbies can pleasantly surprise us all.
Thanks again to David for giving up his time for us.
Best,
Adam.