The £2 Casino Cap – What You Need to Know

Posted by Harry Kane on Friday, March 20, 2020

If the last 18 months have been challenging for operators in the UK’s iGaming sector, there’s a suspicion that the worst may be yet to come. After all, the regulatory climate is becoming increasingly stringent on these shores, with a comprehensive ban on specific payment systems set to be rolled out on April 14th this year.

Following on from the £2 FOBT cap and the 6% hike in Remote Gaming Duty (RGD), this has the potential to hit multichannel operators particularly hard, with brands such as William Hill estimating that between 5% and 10% of their online deposits are processed using the payment system which is about to be banned.

Even more worryingly, the UK Gambling Commission (UKGC) is now considering recommendations to impose a £2 betting limit on all iGaming verticals, including slots, table games and video poker.

These proposals have been drafted by the APPG, which is a cross-Parliamentary group tasked with investigating (and ultimately reducing) gambling-related harm in society. Make no mistake; they also have the potential to disrupt the iGaming market significantly and may even put a number of smaller operators to the sword.

The Online Betting Cap – What Do You Need to Know?

When the UKGC announced its core strategic objectives through 2021, few could have expected the long-term impact on iGaming operators.

After all, the desire to safeguard vulnerable players and enhance the overarching reputation of iGaming brands has become an all-consuming obsession, one that has both inspired changes in legislature and seen unprecedented financial sanctions imposed on operators.

As the industry regulator itself has sought to tighten the market conditions and make operators more accountable for their behaviour, so too recent incumbent governments have moved to crackdown on the perceived excesses of the iGaming market.

No single instance embodies this better than the aforementioned FOBT cap, which saw the maximum bet threshold for fixed-odds betting terminals at brick-and-mortar locations slashed from £100 to just £2.

Although the imposition of a cap itself did not come as a surprise to industry stakeholders, the extent of the limit sent shockwaves through the industry and came in significantly lower than the £30 threshold recommended by the UKGC.

While few could have argued with the decision to limit FOBT thresholds, bookmakers railed against the failure to stagger reductions and minimise the subsequent economic home.

At the time of the announcement, it was thought that the income generated by FOBTs accounted for 56% of bookmakers’ total turnover, while it was also predicted that the new legislation would trigger thousands of store closures and job losses nationwide.

Despite targeting offline betting practices, the FOBT cap had a huge impact on a host of multichannel operators who just happen to dominate the iGaming space. It also undoubtedly established a precedent for legislating online gambling with similar tenacity, while providing a quick ‘win’ for governments that are looking to curry favour with the general public.

To this end, the FOBT cap was quickly followed by a 6% hike in the RGD, creating a scenario where operators are now required to pay a fixed-rate of 21%. This was largely implemented as a way of offsetting the Treasury revenue losses incurred as a result of the FOBT cap, but it also sent a clear message that iGaming operators were firmly on Parliament’s radar.

As if to exacerbate the growing sense of unease amongst iGaming brands, it was the government department for Digital, Culture, Media and Sport (DCMS) that played a driving role in enforcing the ban of the targeted payment system.

More specifically, the UKGC opted to impose a full ban following an investigation and recommendation from then-Culture Secretary Jeremy Wright, which revealed that up to 20% of all iGaming transactions were funded using borrowed funds.

On a similar note, the cross-Parliamentary APPG group (which is chaired by former Tory leader Iain Duncan Smith) has been established to investigate the impact on gambling-related harm in society.

Following this, the APPG has made a number of radical recommendations to the UKGC, with the most striking of these being a blanket, £2 betting cap across all online verticals. In simple terms, this would follow a similar template to the FOBT cap, while it would also restrict verticals that currently have minimal or non-existent betting limits.

Initially, it had been speculated that the £2 cap would only be applied to online slots, which currently account for nearly two-thirds of the iGaming GGY and enable players to wager in excess of £500 per spin in some instances.

This would have been deemed worrying enough by key stakeholders in the iGaming space, but the rollout of a £2 cap across the entire market could have potentially seismic consequences for operators across the board.

Following the recommendations by the APPG, a six-month review period will now ensue, during which the UKGC will consider the £2 betting cap and its likely impact in the market.

As a result, operators are sure to remain on tenterhooks in the near-term, while the share values of the market’s leading brands have already declined markedly following the announcement.

Assessing the Likely Impact of the £2 Betting Cap

Of course, it should be noted that the £2 online betting cap is nothing more than a proposal for now, while operators have a window of opportunity to lobby the UKGC and take proactive steps of their own to help discourage the regulator from imposing such drastic action.

However, it’s little wonder that operators are currently fearing the worst, especially with the UKGC increasingly inclined to follow Parliament’s recommendations and the regulatory climate that currently exists in the UK.

But if the recommendation was to be upheld, what exactly should operators expect in terms of the likely impact? Interestingly, the profitability and GGY of operators is unlikely to be adversely affected, as this only refers to the difference between total bet value and the amount paid out to players.

So, although the amount wagered by players would reduce considerably, the average pay outs would decline by a similar percentage and enable operators to retain similar profit margins over time.

Clearly, however, turnover would take a significant nosedive, with the value of slots and high-stakes table games slashed dramatically.

For example, high-variance slot games with relatively low return-to-player (RTP) rates can currently compel individuals to wager in excess of £125 per spin, so introducing a maximum cap of just £2 would slash revenues while making the associated games less appealing to players.

The upshot of this would be a significant reduction in takings, creating profitable but smaller operations that cater to a dwindling audience.

Similar to the FOBT cap, this may also trigger job losses and significant restructuring within individual businesses, while restricting long-term growth and the overall user experience online.

Of course, the real question is not how operators can adapt their business models to remain profitable and generative in the UK market, but whether they’d be inclined to stay on these shores in the event of a £2 betting cap.

To understand this threat further, we need to consider the regulatory challenges already facing operators in the UK, while considering the respective growth potential and legislative hurdles that exist in alternative markets.

Let’s start in the UK, where operators are arguably being pushed to breaking point by a constantly changing regulatory climate. From the profit-slashing FOBT cap to the 6% hike in RGD imposed on operators, company margins are being squeezed at both ends as firms increasingly find themselves at a competitive disadvantage.

With these points in mind, there’s little doubt that the combination of a comprehensive ban of a specific payment system and a £2 online betting cap could tip the balance for UK-based operators and encourage them to consider relocating elsewhere.

If we now turn our gaze outward, we can also see that less mature markets across the globe are currently offering a potential safe haven for British iGaming brands that are keen to optimise their profitability.

The most obvious example resides in the U.S., where the May 2018 decision of the Supreme Court to overturn the so-called PAPSA legislation (which originated in 1992 and prohibited sports betting at a national level) paved the way for several state authorities to legalise the practice.

Many more states have since followed suit, creating a burgeoning sports betting that’s home to millions of prospective customers and not currently burdened by stringent regulatory control and prohibitive taxation.

With online poker also booming Stateside (having strangely plateaued in the UK) and states such as New Jersey, Delaware, Nevada and Pennsylvania having previously legalised online casino gaming, the North American market is seeing exponential growth and wooing a number of the UK’s leading brands.

William Hill has already blazed a trail in this respect, having forged a number of lucrative partnerships since 2012 and grown to claim a whopping 32% revenue share in the market as recently as 2018.

Paddy Power have also followed suit, following an acquisition by its parent company Flutter Entertainment which has afforded them access to a U.S. market share and established them as part of the world’s largest online betting firm.

Given the immense scope for future growth in the U.S. and the existing lack of regulatory red-tape at state level, it’s likely that any form of stringent betting cap in the UK would see operators redouble their international focus and invest more of their capital overseas.

Additionally, the Spanish government has taken proactive steps to drive growth in its own iGaming market recently, while actively incentivising operators to relocate to its shores.

To begin with, the legislature has reduced the rate of gross gaming revenue tax payable by iGaming operators from 25% to 20%, bringing it lower than the corresponding rate in the UK for the first ever time.

At the same time, it has empowered semi-autonomous enclaves such as Ceuta to offer further incentives to operators, including a basic tax rate of just 10% on net profit.

At the same time, iGaming brands can also benefit from a rate of corporation tax as low as 12.5%, enabling them to slash their operational costs and optimise their profitability going forward.

Not only this, but enclaves of this type also offer an opportunity for UK operators to retain access to the single market post-Brexit. This may not be an option if the UK is unable to strike an amicable trade deal with the remaining members of the single bloc, but even in the best-case scenario it’s likely that access to the market will be restricted.

As we can see, these various factors are combining to create something of a personal storm in the iGaming market, creating a scenario where operators may have the inclination and opportunity to relocate abroad as a way of boosting their profitability.

The Bottom Line – What’s In-store for the iGaming Market?

While some independent operators would undoubtedly be unable to cope with the consequences of a £2 online betting cap, it’s fair to say that the vast majority of market-leading brands would retain the resources and profit margins to survive the worst of the fall-out.

Although we wouldn’t expect to see dominant iGaming brands collapse in the wake of a £2 betting cap, however, there’s a far greater risk of operators relocating overseas and potentially leaving the UK market isolated and little more than a shell of its former self.

Of course, this wouldn’t solely be a result of any £2 (or similar) online betting cap, but it would almost certainly serve as the catalyst following a series of regulatory, social and legislative changes that have gradually undermined operators and the overall growth of the iGaming space.

Ultimately, everything depends on the decision of the UKGC, and while some form of online betting cap is inevitable, introducing a threshold at £30 or staggering the cuts would provide some solace for the market.

At the same time, operators should look to be proactive by convening and perhaps agreeing their own form of betting restrictions, as this may represent a compromise that prevents the worst-case scenario.