Beyond Brexit Day – What Next for the iGaming Market?

Posted by Harry Kane on Saturday, February 29, 2020

Brexit day has finally arrived in the UK, an incredible 1,317 days after 52% of the British electorate voted to leave the single bloc in the 2016 referendum.

A moment of celebration for some, this also triggered a period of dark reflection for others, many of whom believe that leaving the EU will have a catastrophic impact on the UK’s economy and its various industries.

This includes the iGaming market in the UK, for which the reality of Brexit could scarcely have arrived at a worse time. More specifically, online gambling firms are already dealing with an increasingly stringent regulatory and legislative climate in the UK, while being forced to pay increased levies in tax and Remote Gaming Duty (RGD).

In the post below, we’ll appraise the current state of the market, while asking what the short and long-term future holds for the UK outside of the EU.

The State of the Market – How has It Fared of Late?

As we’ve already surmised, Brexit has arrived at the worst possible time for the iGaming market in the UK, which is already dealing with a raft of social, economic and regulatory challenges as 2020 gets underway.

To begin with, the GGY produced by the iGaming market experienced its first ever decline in the year ending March 2019, falling by 0.6% from £5.6 billion to £5.3 billion in 12 short months.

While this figure was exacerbated by an unexpected 11% decline in virtual sports betting (and specifically horse racing wagering), the decline represented a seminal moment for an ailing market that also saw its overall share of the UK’s gambling market contract by 0.1% to 37%.

Arguably, this decline has been long overdue, especially when you consider the uncertainty and negativity that has plagued the market over the course of the last two years or so.

One contributing factor has been the well-intended machinations of the UK Gambling Commission (UKGC), which in 2018 announced the safeguarding of vulnerable players its core strategic objective through 2021.

This has seen the Commission adopt an increasingly stringent regulatory approach and roll-out a number of new guidelines for operators to adhere to, while they also issued total penalties of £19.6 million to a number of brands in 2018/19.

This has clearly had an impact on operators’ short-term revenues and profitability, while forcing many to adapt their approach to responsible gambling and policies pertaining to withdrawals.

For example, operators were instructed to create greater transparency around their bonus terms and conditions, after customers complained that winnings were being withheld as a result of stringent and unclear wagering requirements.

Brands have also been required to tighten their verification processes, closing a 72 hour window for individuals to credit their accounts and wager before their identification details have been confirmed.

In truth, these measures are damaging enough by themselves to have impacted negatively on the iGaming market (particularly in the short and medium term).

However, both responsible gambling campaigners and cross-Parliamentary groups have asserted that such measures don’t go far enough, which means that additional changes are threatening to derail the market further in 2020.

One proposal has suggested that online slots should be hit with a £2 betting cap, similar to the one imposed on FOBTs (which was rolled out in April). This would have a potentially devastating impact on the iGaming space, with slots accounting for nearly two-thirds of the online GGY and a key driver of new custom.

This may also form part of a wider and more comprehensive review of the Gambling Act 2005, which has been described by both Labour’s former Deputy Leader Tom Watson and the recent Conservative Party manifesto as “analogue legislation for the digital age”.

This could include a number of sweeping measures, including a comprehensive review of all existing licenses and the creation of maximum deposits and wagers across every single gambling vertical (including slots).

This combination of increasingly stringent regulations and proposed legislative changes has taken its toll on operators and the market as a whole, resulting in incredibly uncertainty, declining share values and the aforementioned drop in the online gambling GGY.

Operators (particularly multi-channel brands that have also seen their turnovers impacted by the FOBT cap) have been impacted further by a recent 6% increase in the rate of RGD payable, which came into force as part of the October budget in 2019.

Of course, this cynical decision was taken as a way of offsetting Treasury losses that have resulted from the FOBT cap, with the government keen to leverage the currently lucrative iGaming market while continuing to propose further crackdowns industry wide.

This is an interesting juxtaposition, and one that operators have warned my eventually lead to a significant decline in profitability and the decision to relocate to more beneficial markets.

Interestingly, a number of overseas brands have already left the UK market, with operators such as ComeOn highlighting the competitiveness of the iGaming sector and an increasingly burdensome regulatory climate as the key reasons for their decision.

What About Brexit – Will Anything Change Immediately?

These factors highlight the immense challenges facing the iGaming market in the UK and its market leading operators, and this is before we’ve even broached the complex topic of Brexit.

Make no mistake; this may ultimately prove the catalyst that send the iGaming market spiralling, depending on the trade terms ultimately agreed by the UK and the EU at the end of 2020.

Although the market may be precariously placed at present, however, the good news is that nothing will change in the immediate aftermath of Brexit day. This includes the status of Gibraltar, which remains a British Overseas Territory based on the southern coast of Spain.

While the UK may have negotiated an extension to the current status quo surrounding Gibraltar as part of the transition period that will run until December 31st at least, the long-term future of the island remains unclear and this is a significant concern for British operators based in the region.

One of the key attractions of Gibraltar is its relatively low rates of corporation tax and an online gambling levy that’s fixed at 1% of relevant income, while firms in this location can also attract top talent from both the UK and Spain under the freedom of movement associated with EU membership.

If Britain cannot agree any form of trade deal with the EU and ultimately exits the Union without an agreement once the transition period has ended, however, Gibraltar may no longer benefit from the freedom of movement (with the subsequent cost of commuting rising significantly).

This could trigger an exodus of UK firms, while those that stay may be hit with a significant tax increase in order to offset the associated decline in revenues. Over time, this may slash the market’s profitability while also ending Gibraltar’s status as a tax-haven for UK operators, creating significant upheaval across the board.

For the UK market, the biggest question here is where will operators go if they’re required to leave their Gibraltar base? They could return to these shores, of course, but this may be even more oppressive given the proposed legislative changes and the increased tax burden being placed on firms.

With this in mind, Malta and Spain (both EU member states) may emerge as preferable locations, with Bet365 having already shifted its non-UK business to Malta while reducing its Gibraltar staff count by 80%.

This was done partially to mitigate the potential impact of Brexit, with the company looking to “ensure EU market access and enhance its operational efficiencies” going forward.

Paddy Power has since towed a similar line, and others would most likely follow suit if the UK was unable to strike a viable deal with its counterparts in Brussels.

At the same time, Spain has also been jostling to emerge as the number one location for Europe’s iGaming firms, especially against the backdrop of Brexit and Britain’s regulatory crackdown.

In addition to reducing operator’s gambling taxes by 5% nationwide, the Spanish government has also transformed the enclaves of Ceuta and Melilla into autonomous jurisdictions that can offer further tax breaks to overseas brands.

Since 2018, Cueta in particular introduced various cuts to iGaming and corporation levies, while also authorising reductions of up to 50% in the applicable gambling tax.

These measures have helped Cueta to snare 21 operators so far, including prominent iGaming brands such as Betfred, Playtech, 888 Holdings and Casino777.

Of course, many would argue that Spain’s aggressive tax policy would pose a threat to the UK gambling industry with or without Brexit, but there’s no doubt that the issue of single market access and the volatility caused by Britain’s uncertain future relationship with the EU is compounding the problem for key stakeholders on our shores.

Will Brexit Bring Any Other Challenges?

Clearly, British firms and the market as a whole will have some much-needed breathing space during the transition period, while it’s hard to determine precisely what will happen without knowing the terms of the future relationship between the UK and the EU.

However, the potential lack of single market access is a huge concern for the industry, and this is something that will continue to drive uncertainty as trade negotiations progress between the two parties.

It’s not the only issue either, as an abrupt end to the free movement of people to and from the UK would also hinder the industry’s potential to attract and retain top international talent.

While it has been mooted that Britain will be required to sign-up to similar freedom of movement agreements with future trade partners such as India, this will cause the UK to lose further control of its immigration policy and make it hard to attract talent in specific industries.

This would affect the iGaming industry directly, and make it increasingly difficult for operators to compete with rivals in burgeoning and high-growth markets such as Denmark, Sweden and the Czech Republic.

We’ve already touched on the fact that the RGD payable by brands has increased of late, while licensing may also come under review as part of a revision of the Gambling Act 2005.

As is stands, the rate of RGD will officially increase to 21% in October, while operators contributed an estimated £2.7 billion to the UK government during the last financial year.

Now, while Brexit shouldn’t have any direct impact on the RGD payable by operators (as the EU has no control over member state gambling policies), it’s estimated that the UK Treasury could face a short and medium term financial shortfall following its withdrawal from the EU.

Incredibly, economists believe that Boris Johnson’s much-vaunted Brexit deal could actually cost the UK up to £70 billion over the course of the next decade (in comparison with remaining in the EU), and it’s not unrealistic to suggest that the government may look to offset any losses by targeting relatively profitable markets such as the iGaming space.

The government has recent form in this space, of course, and it would definitely be an interesting space to watch Brexit as plays out on the international stage.

The Last Word

Ultimately, the numbers surrounding the iGaming industry make for stark reading. Currently worth an estimated £5.3 billion each year and employing around 106,000 people, it’s certainly a growth market that has contributed significantly to both the government and the labour market in recent years.

However, it’s also facing huge economic and social challenges, including the pressing need to safeguard vulnerable gamblers and cover the estimated £1.2 billion cost of treating gambling addicts throughout the UK.

With these challenges in mind, Brexit has arrived at an unfortunate time for the marketplace, and it undoubtedly has the potential to serve as a catalyst for further decline and the exodus of leading firms over an extended period of time.

While nothing will change for now, operators must place their fate in the hands of the incumbent government and their ability to negotiate a successful trade agreement with the EU. Otherwise, the iGaming market in the UK faces an uncertain future and one that could leave it a shadow of its former self.