As an industry sector, eGaming has seen unprecedented growth in recent years. The ever-increasing popularity of online or mobile gaming and gambling is evidenced by the number of adverts for online casinos, betting or bingo sites, but perhaps more tellingly from its contribution to the economies of those countries which claim expertise in eGaming.
In the four leading eGaming jurisdictions in Europe (the Isle of Man, Guernsey, Malta and Gibraltar) eGaming contributes more than 10 per cent of each country’s GDP. Further evidence of the intrinsic value within the eGaming industry, if any were needed, can also be found in the €5bn price tag attached to the recent sale of Pokerstars, headquartered in the Isle of Man.
Regulation of this thriving industry has been essential due to the potential for fraud, money laundering or simply unscrupulous business practices, and there has been a balancing act for regulators to ensure the integrity of the industry without unduly constraining operators and preventing growth. The regulations introduced in the countries named above, as well as those recently introduced in Jersey, France and the UK, are stringently policed by the industry regulator in each country, and have provided a safer environment for both the eGaming operators and their players.
A vital aspect of these regulations remains the protection of players’ funds. Without exception, all gaming regulators have introduced provisions to ensure the protection of players’ funds, although the form of this protection has ranged from simply segregating the funds from the gaming companies’ own funds (operationally, if not legally) through to a requirement for players’ funds to be controlled and managed by an independent third party such as a trustee. A similar difference in approach can also be seen in the fact that certain gaming regulations simply recommend the best practice for protecting players’ funds, whilst others are prescriptive in their operation.
Why Do We Need Player Protection?
Nobody doubts the need for strong regulation of the eGaming industry, but player protection is a concept which is often misunderstood, particularly when viewed against the background of the traditional gambling industry. How many people when walking into a high street bookmakers or a casino would think to ask what happens to their stake, or to the money used to purchase chips? It is no surprise, therefore, that players simply assume a similar level of protection and security when placing funds with a reputable online gaming company.
There are, however, significant differences. Setting aside the most obvious difference, that when gambling online there is no physical interaction between player and gaming company, there is a significant difference in timescale for the player’s funds to be at risk. In a casino, most players will purchase chips at the beginning of the evening and cash in those chips as they leave; in such circumstances their greatest risk to their money (other than that posed by the many temptations within the casino!) is that somebody breaks the bank, meaning that the casino is unable to return their winnings to them (and for which protective measures are in place). Similarly, even for a high street bookmaker it is highly unlikely that somebody will place a bet much more than a week in advance of the race.
Contrast this situation with online gaming. Whilst some players will still introduce funds to their account for a specific purpose or event, place their bets and retrieve their winnings, it is far more common for players to have a standing account in which they would leave a balance to utilise as they see fit. There is, therefore, a much longer period for which those funds are at risk, whether through the failure of the gaming company or simple misappropriation.
It can be seen, therefore, that there is a clear need for some form of protection of said funds, and it is for this reason that player protection has become an integral part of online gaming regulations.
Methods of Protecting Funds
Protection of player funds can take various forms. In order of increasing security the main methods are:
Reputation and goodwill – a player could choose to deposit his funds and accept that they are safe simply because of the size and reputation of the company with whom he is dealing. Rather worryingly, a well-known name in gambling (both online and in the high street) advocated precisely this view in their response to the UK Gambling Commission’s consultation on player protection, a view which is shared by few, if any, of their peers and competitors.
Simple segregation – gaming companies could choose to hold player funds in a separate account to avoid co-mingling them with their working capital; however, this provides no real protection other than avoiding funds being spent inadvertently.
Legal segregation (commonly known as Quistclose arrangements) – a widespread practice is the establishment of a separate player funds account with a bank, with this account being designated as such in order to distinguish it from the company’s own funds. The company still has full control of, and access to, this account therefore there is no protection from fraud or misappropriation by an employee of the gaming company; however, there is general acceptance that it does at least provide a degree of protection from the failure of the company. Although the Quistclose arrangement has been shown to work in other circumstances, it has not yet been tried and tested in the eGaming industry.
Insurance – it is possible for a gaming company to take out an insurance policy in order to allow them to repay player funds in the event of a business failure or insolvency. The premium for such a policy will obviously be dependent on the standing of the company itself, but in any case is a sunk cost which cannot be recouped if the policy is not utilised.
Independent control of player funds – whilst this could take various forms, the most obvious method is a player protection trust. In simple terms, the gaming company establishes an independent trust, which holds an agreed balance (typically equal to or slightly greater than the value of player funds to be protected) on trust. Until a default event occurs (such as insolvency of the gaming company) funds may move back and forth between trust and company, however once a default occurs the funds are legally separate from the gaming company and cannot be accessed by a liquidator. As such, provided the trust is fully funded (which is achieved by requiring the provision to the trustees of regular reports of player balances) the player funds are fully protected at all times.
Whilst the benefits of protection to the players are clear, it should not be forgotten that this also benefits the operator, who is able to attract more players who are safe in the knowledge that their funds are protected.
Why the Isle of Man?
Player protection trusts meet the requirements of the Isle of Man’s eGaming regulations fully, and indeed the trust mechanism operated by First Names Group has been approved by the Gambling Supervision Commission for use by any Isle of Man regulated business. However, Isle of Man trusts are also used for companies regulated elsewhere for the following reasons:
The Isle of Man has a long history of asset protection and is known for having robust legislation in this area
The island has a tried and tested judicial system, with well-established trust law
The island’s trust industry is widely respected and has significant depth and breadth of experience
As an island with a significant eGaming industry of its own, local trustees have an unrivalled knowledge of the application of trust law whilst taking account of any special requirements of the eGaming industry.
The benefits of using an Isle of Man trust can therefore be seen to apply to an online gaming company wherever established and regulated, not only in providing comfort to the regulator, but also to players who know that their funds are under the stewardship of independent and professional trustees.
What Does the Future Hold?
As the online gaming industry matures, so too the sophistication of those participating in online gaming will also increase. New names in online gaming are constantly appearing, and it will no longer be sufficient for a company to rely on its existing brand or long-standing history on the high street to provide comfort to those who wish to gamble their hard earned money. Formal regulation is being embraced by more countries as the industry grows, whilst the existing regulations in those countries with a mature eGaming industry is constantly evolving in order to provide further security to players, investors and stakeholders in the industry in general.
Regulation must be fit for purpose, however, and the use of a well-established concept such as a trust to provide legal and beneficial separation of players’ funds from the company with which they are deposited is an excellent example of how the relatively young eGaming industry has embraced a tried and tested concept which has been in existence since the Middle Ages. Further developments in regulation are inevitable, but as long as regulators, gaming companies and professional advisors such as trustees continue to work together any changes will provide greater security for stakeholders without unduly constraining the growth of the industry.
Players in the eGaming community are all too familiar with the concept of gambling with their funds, but it would be reasonable to assume that they only intend to put those funds at risk when putting them on red or black, or picking the winner in the 3.15 from Newmarket. They would be less than happy if they felt that their funds were also at risk simply by having been placed on deposit with an online gaming company.
Player protection regulations significantly mitigate that unintended risk, and the player protection trust championed by the Isle of Man is widely recognised as the gold standard in its field. The use of such a mechanism by companies such as the leading online poker brand demonstrates a strong respect for, and commitment to, the protection of their players’ funds, and is something we at First Names Group expect to see in much greater numbers in the future.
Craig Brown, Client Services Director, First Names Group, Isle of Man