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Gambling White Paper (Part 2)

Article authored by Andrew Tait

The Gambling White Paper: Illegal Lotteries, Prize Competitions and Free Draws
In this article, Andrew Tait, Head of Betting & Gaming, explores one of the proposed measures in the White Paper on Lotteries and Gaming, namely a clamp down on illegal lotteries and to bring prize competitions and free draws into the regulated sector.

The first article on the UK Gambling White Paper summarised the scope and intent of it. Be sure to check out the first instalment here.

In this article, we will explore one of the proposed measures to clamp down on illegal lotteries.

This measure is only briefly mentioned in the White Paper, but it does highlight concern over the rapid expansion of unregulated competitions and draws, often run by large corporate businesses. These competitions are seen to unfairly compete with licensable or exempt lotteries, which are not for profit, required to contribute to charity, and limited in the size of entry fee pools and prizes.

The proposed measures would bring these unregulated competitions into the regulated sector, ensuring that they are fair and transparent and that the proceeds are used for good causes. The Gambling Commissioner’s advice to the government, as part of the White Paper review of the 2005 Gambling Act (the Act) provides further detail on the intended measures.

Commercialisation of Prize Draws by Big Business: A Growing Concern for the Gambling Commission
The Gambling Commission (Commission) has been warning organisers of prize draws against crossing the line into running or promoting illegal lotteries. In recent years, there has been a boom in “house raffles” as an alternative means to buy and sell property. However, these often do not work out well for participants, as entry fee pools fail to reach minimum thresholds for draws to go ahead.

The Commission is now more concerned about the emerging commercialization of these prize draws by big business. Since 2019, there have been 549 reports about 386 entities running such draws. The largest of these companies are Raffall, Elite Competitions, Bounty Competitions, Raffle House, and Omaze. In parallel, the number of complaints stemming from such draws has risen by approximately 35% between 2019 and 2021.

These prize-draw companies use major advertising, including TV commercials and social media campaigns. The Commission is particularly concerned about the latter, given the propensity for under-18 exposure. Indeed, the Commission worked with Facebook from January to August 2021 to shut down a number of illegal lotteries on that platform. During this period, they saw an increase of almost 50% in illegal lottery enforcement action compared to the whole of 2019. 

The Commission is deeply concerned about the impact of prize draws, not only on vulnerable groups such as minors but also on consumers who may mistakenly believe these draws are regulated and charitable like licensable and exempt lotteries. Moreover, regulated lotteries may be urging the Commission to address this perceived unfair competition due to their own operational restrictions. As a result, the White Paper and the Commission’s advice propose regulating these unregulated draws similarly to exempt (small society) lotteries.

How are these prize draws considered unregulated
According to Section 339 of the current Act, competitions offering prizes do not qualify as gambling if they fall outside the Act’s definitions of gaming, betting, or lotteries. Section 6 of the Act defines gaming or a game of chance as any game involving chance or a combination of chance and skill, except where the level of skill is so high that it eliminates the effect of any chance element. Actual wagering is not necessary for games of chance to be classified as gaming. Therefore as long as there is more than an insignificant element of chance and a prize for the winner, then it’s considered gaming. Therefore, this is not a primary concern for the Commission, given the difficulty in qualifying as a gaming-based prize competition.

Instead, the Commission has more concerns over betting and lottery-based prize competitions, given the relative ease such draws can be constructed to come outside the definition of gambling and as such qualify as unregulated activities under Section 339 of the Act. 

Licensable betting and lotteries require all three of the following elements: 

  • A participation fee or bet
  • Winning determined by chance or guess; and
  • A prize 

In betting and lottery-based prize competitions, the most common “loophole” is the ‘free entry route,’ where the lack of a mandatory payment places it outside the definition of betting or lottery gambling. Commercial prize competitions like Elite Competitions, Bounty Competitions, Raffle House, and Omaze often use this approach. Companies generate substantial revenue by offering both paid and unpaid entry options while encouraging participants to opt for the paid route. This practice is legal, as long as it complies with Schedules 1 and 2 of the Act, which outline rules for free entry in betting and lottery prize competitions. These address many practical scenarios, such as any form of mandatory payment (not just to enter the competition) that could be levied at any stage of the journey, such as the right to see if a prize is won. These also address schemes to prejudice free entry versus paid entry. The Commission has published detailed guidance on this which further explains how it interprets the definition of lottery and betting-type prize competitions. In essence, the free entry route is valid if it can be shown that those wishing to participate for free are not blatantly discriminated against or not at a technical disadvantage compared to a paid entry route.

The other “loophole” revolves around circumventing the requirement for a winning outcome to be determined by chance or a guess. In betting prize competitions (Section 11(2) of the Act), “determination by chance or a guess” includes some use of skill or judgement-based predictions. Lottery prize competitions (Section 14(5) of the Act), also refer to the use of skill, judgement, and in addition knowledge. However, if skill, judgement, and knowledge are at a level that would prevent a significant number of participants from winning a prize or even entering the competition, then the second necessary element of the chance / guess will be deemed to be exceeded, and thereby allowing such competitions to fall outside the definition of betting or lottery gambling (irrespective of any entry fees). 

The term “significant” in this context lacks a specific definition, but the Commission’s detailed guidance stipulates that competition organisers must provide studies or evidence showcasing that the skill, judgement, or knowledge requirements are high enough to limit the number of participants and potential winners. For instance, Raffall operates as a provider of skill-based prize competitions, where only participants who answer the entry question correctly are entered into the prize draw. The assessment can be subjective in the absence of empirical evidence if the organisers can show that they “reasonably expected” the level of skill, knowledge or judgement to be sufficiently high to eliminate participants or potential winners. 

In the Act, there are two offences namely illegally promoting and facilitating a lottery, as outlined in Sections 258 and 259. The defence against these offences is contingent upon the organiser’s reasonable belief that the betting or lottery prize competition provided a valid free entry route or required a sufficient level of skill, knowledge, or judgement. Consequently, the Commission acknowledges the difficulty in justifying criminal proceedings, as organisers often have expert advice or studies supporting their operations.

The Commissions Suggested Approach
The Commission, in their advice, suggested changing the legislation itself to tighten up the definition of lottery and betting, thereby limiting the scope of the prize competition exemption. To expedite this process, they propose the route of amendment via statutory instrument under the Secretary of State’s discretionary power in Schedules 1 and 2 of the Act, regarding payment definitions for entry. The same route is available under S14(5), allowing the Secretary of State to modify the definition of lotteries in terms of skill, knowledge, or judgement.

The changes to the payment to enter definition could include further clarity on discriminating against the free entry route. This could involve the banning of additional free draws for early responses (discriminates against free entry postal applications) or any limitation on the number of postal/ free entries.

It is likely that the changes will go even further, perhaps eliminating the option of postal entries as a free entry alternative. In the digital age, postal entries are clearly at a disadvantage, as online entries (whether paid or free) would simply level the playing field. The ultimate measure would be to remove the alternative route altogether, such that any payment would trigger regulation as a lottery. However, this measure would need to take into account legitimate product promotions that are based on free draw entries as an incentive to buy goods or services.

Changes to Section 14(5) may be more difficult to achieve as setting the appropriate qualifying level of skill, knowledge or judgement will be hard to arrive at, let alone evidence. One possible change would be to replace the word “significant” with “majority,” which would set a clear threshold of 50% or more. This would also require the word “wholly by chance” in Section 14(2) to be replaced by just “chance.” Additionally, the phrase “reasonably to be expected” could be replaced with “is shown to,” which would make the test more factual and objective, making it easier for the Commission to monitor and enforce.

These and other changes may accomplish the Commission’s stated goal of bringing such prize competitions within the regulatory net by treating them in a similar fashion to exempt small society lotteries. These lotteries do not require a licence, but they must be registered with the local authority. They also have strict limits on their proceeds, with a maximum of £20,000 or £250,000 per year. The maximum prize is £25,000, and 20% of the proceeds must go to a non-commercial purpose.

The above-proposed changes would be a death blow to the current commercial prize competitions businesses. Therefore, these businesses need to participate in the upcoming consultation and provide evidence to dissuade the government from carrying out its intentions.

If you have any questions about the contents of this article or how the UK White Paper may affect your business or commercial interests, please contact Andrew Tait, our Head of Betting & Gaming.

This article titled “The Gambling White Paper: Illegal Lotteries, Prize Competitions, and Free Draws” was originally published by Ramparts on 31 July 2023 by Andrew Tait, Head of Betting & Gaming at Ramparts. It is being republished here with permission.