Regulation…Who Needs It?

Regulation of games of chance is, by its nature, a social policy issue aimed at protecting consumers. Despite this shared principle being the cause, the intensity of regulation of gambling sectors can vary and a constructive debate on the issue must inevitably entail a comprehensive understanding of the multi-faceted nature of regulation.

This article is based on Lea Meyer’s presentation at EL Seminar in Brussels, November 2017.

Regulation constitutes one of the main modes of public governance. It is the instrument which implements public policies and structures the delivery of public services. Regulation’s aim is to alter the behaviour of actors in a given sector.

Rationale for regulation

Regulation of games of chance falls under the category of social regulation. This is essentially the will of a democratically elected executive to bring a subject into the public policy sphere because of a political, ethical or social imperative. It usually addresses a public interest such as health, the environment or security, and the economic impact is usually not the main concern. In this context, prevention of the potentially harmful effects of gambling, namely pathological gambling i.e. addiction, is the principal motivation.

Pathological gambling is characterised by enduring and repeated maladjusted gambling behaviour that diminishes personal, familial or professional aims, invariably leading to problems in those spheres.

Gambling addiction is a problem in its own right for the persons affected by it, but arguably, it also represents a problem in terms of the limitations it puts on the operations of organisers and the state.

In a sense it threatens the business model by introducing limitations and concerns at the social and political levels. It is a situation that few organisations can afford to ignore.

Another rationale for gambling regulation is the protection of minors. In most jurisdictions, gambling is age restricted and operators are required to ensure that minors are prevented from participating.

A second rationale for regulation is the prevention of associated criminality. The main focus here is money laundering, fraud and corruption. However illegal gambling, both land-based (in back-stores) and cross-border (via internet), also fall in to this category.

Equally, regulation allows states to benefit from the large scale economic activity, by receiving a share of, or in some cases all, the profits generated by operators.

Thus, we see that the reasons for regulation are very similar, however their form can vary widely. A useful means of differentiating the form of regulation is by analysing its intensity.

Multifaceted approach to regulation

Usually regulation is simply reduced to its jurisdictional and fiscal components, however, it is far more pervasive, playing on two dimensions – intensity and scope.

Regulatory intensity can be evaluated by means of ten different parameters, which can be grouped into two main components: regulatory scope and regulatory stringency. The next table summarises the different parameters making up a regulation.[1]

Scope defines to what extent the regulation affects a specific sector or organisation. It includes factors such as the market structure i.e. the level of competition allowed in the sector, regulatory reach – whether there are further legal obligations beyond simply obtaining a license, the imposition of a specific public use of the net profits, the imposition of the type of ownership by the regulation or the presence of a public nature in the organisation above and beyond the issue of ownership (“Publicness”). The second dimension is regulatory stringency. Stringency is the degree to which the organisation’s activities are constrained by regulation. It occurs on two levels – the regulator and the organisational level.

The level of the regulator focuses on whether there is actually a regulator or not, and if so, what are its competencies. This might seem simplistic but if nobody actually monitors the implementation of regulation or the body responsible for the implementation has no actual power, the regulation is not effective and will result in a low regulatory stringency. Also this looks at the level of professionalism of the regulator and investigates the sector specific knowledge a regulator has or is acquiring.

Level of the organisation is the second dimension within stringency, and focuses on how regulation impacts the organisation’s daily business. This includes things like distribution channel, product or advertisement restrictions and the legal obligation of internalising negative externalities. Gambling addiction, money laundering and other criminal activities are a feature of the industry and can be described as negative externalities. Internalisation investigates whether the regulation imposes a duty to take into account these externalities and minimise them.

Organizational Response to Regulation

There is a strong relationship between regulation and the management of the organisations subject to it. How a sector is regulated can have significant and far reaching consequences on how that organisation defines its performance and of course, the performance level itself. An argument can be made for a multidimensional performance definition embracing six dimensions and in which key performance indicators should be developed, measured and reported:

  • The financial dimension, as the traditional performance criterion, refers to revenue and profits.
  • The operational dimension focuses on how an organisation produces and delivers a service or product. It relates to internal processes and includes customer related indicators, learning and growth indicators, and internal business processes indicators.
  • Stakeholder management is the third dimension and it essentially looks at performance in relation to investors, employees and suppliers i.e. actors who have, in one form or another, invested in the company.
  • The fourth dimension is the legal requirement dimension. Here activities undertaken which are in compliance with regulatory obligations are measured.
  • Social issue participation is the fifth dimension. It is not directly linked to shareholder value creation but rather it relates to activities which benefit wider society. The idea behind this is that companies should not only optimise short-term financial performance but also voluntarily create value in and for society.
  • Sixth is the public values dimension which analyses performance of the values an organisation upholds – fairness, transparency, equality and inclusiveness.

An organisation able to demonstrate that they are at least as concerned as their regulator about their external impact gains credibility and is much more likely to have a voice in the creation and enactment of regulation. This in turn serves to secure the ability to influence.

The aim of regulation of games of chance is consumer protection.

Operators wishing to have balanced, effects-oriented regulation have to be at least as active and concerned as their regulator….arguably more so. Their contribution to social good will pay dividends that equate to stronger influence in the formation of regulation and operations more aligned with the aspirations and orientation of your clients. This can only lead to more secure profitability and longevity.

 

About the author of this article : Dr. Lea Meyer

Director of Polaris Strategic Foresight (PSF), offering research and consultancy aimed at assisting organisations in developing consistent, sophisticated performance strategies and strengthening relationships between regulator and operators. PSF also offers employee training, accreditation assessment and pre- and post regulatory research.

 

[1] For more information see “The Influence of the Regulatory Environment on the Definition of Organisational Performance – the Example of the Sport Betting and Lottery Sector”, Haupt 2015, https://www.haupt.ch/Verlag/Buecher/Wirtschaft-Recht/Public-Management/The-Influence-of-the-Regulatory-Environment-on-the-Definition-of-Organisational-Performance.html .

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