Brexit Update – How Will a No-Deal Impact on iGaming in the UK?
Posted by Harry Kane on Thursday, April 25, 2019
Last month, we wrote about how the uncertainty surrounding Brexit was continuing to impact on the iGaming sector in the UK. Back then, British-based operator Betfred announced that it was relocating its digital operators from Gibraltar to the semi-autonomous Spanish enclave Ceuta, with four other brands considering relocating to the North African coast.
Four weeks represents a lifetime in the world of politics, however, with Prime Minister Theresa May’s EU withdrawal agreement having suffered two defeats in the House of Commons during this time. As a result of this, European Council President Donald Tusk has called an emergency EU summit for April 10th, while conceding that a no-deal Brexit was “more likely” after the recent Commons vote.
In this article, we’ll provide an update on Brexit and its impact on the iGaming market in the UK, whilst asking how businesses will cope in the wake of a no-deal exit from the EU.
The Story so Far – How Are Brands Reacting to the Negotiations?
While the continued uncertainty surrounding Brexit has caused considerable consternation amongst gambling operators that are active in the UK market, it has yet to take its toll on the sector’s growth and gross gaming yield (GGY).
In fact, the overall GGY for the UK gambling industry peaked at £14.4 billion in the year ending March 2018, with the British government locked in arduous negotiations with the EU at this time.
Even more pertinently, the total GGY for the iGaming sector reached £5.4 billion during the same period, with this number increasing by a staggering 13.7% year-on-year.
These numbers betray the exponential growth that has continued to grip the gambling industry against the backdrop of Brexit negotiations, with the iGaming market and online slots leading this relentless charge.
Make no mistake; this sustained and marked growth has heavily influenced the minds of iGaming leaders, who have so far remained strong in the face of considerable volatility and the increasing likelihood of a no-deal Brexit. The obvious hope remains that the iGaming market in the UK (and indeed the gambling industry as a whole) is big and robust enough to withstand the fall-out from any Brexit scenario, although key players would obviously prefer Britain to exit the union with some form of a withdrawal agreement.
The tide may be turning, however, with some suggesting that the market’s incredible growth and high levels of investment have continued on the assumption that the UK government would ultimately strike a mutually-beneficial deal with the EU. This may have always been an optimistic ideal, of course, and the growing likelihood of a disorderly Brexit may finally be hitting home in the iGaming sector.
This sense of realisation and acceptance has almost certainly encouraged Betfred to relocate their digital operations from Gibraltar and Ceuta, with the former central to the Brexit negotiations and facing the prospect of losing its single market access (either immediately after a no-deal Brexit or in 2020 under the terms of a temporary deal struck with the EU).
This agreement would allow Gibraltar unfettered access to both the UK and the single market for a sustained period after Brexit, but whether this could be implemented without a withdrawal agreement in place (or an agreed transition period) has yet to be seen. Given this, and the fact that the House of Commons is locked in a seemingly unbreakable stalemate over Brexit, it’s little wonder that operators based there are considering relocating.
Elsewhere, online operator 188Bet recently decided to abruptly close all of its sites and activities in the UK, Ireland, Gibraltar and the Channel Islands. While the operator has confirmed that customers will have until August 30th to withdraw any remaining funds in their accounts, they failed to warn consumers or provide any viable explanation for the decision.
However, the decision to immediately curb all activity in the UK and its overseas territories seems telling, and it’s hard not to countenance the idea that Brexit was a key consideration. After all, the 188Bet brand remains primarily focused on its Asian player base, with the UK arm of their venture likely to become unprofitable in the event of a disorderly exit from the EU.
Betfred and 118Bet are not the only operators looking to restructure their ventures, however, with PlayFrank, Betfair and Paddy Power has recently moved their headquarters to Malta in a bid to beat the Brexit fall-out.
Bet365 has also recently accounted that it would move its operations from Gibraltar to Malta, now dubbed the iGaming capital of Europe, citing the uncertainty surrounding Brexit and the British Overseas Territory as one of its primary triggers.
Malta is certainly providing something of a sanctuary to iGaming brands in the UK and Gibraltar, with the country offering low taxation, full single market access and a secure EU membership that can be traced back to May 1st, 2004. This was borne out by a statement issued by a Bet365 spokesperson last year, who claimed that the brand needed to “increase its existing presence in Malta, which provides a mature and robust regulatory environment for the industry”.
The Maltese iGaming sector already employs more than 10,000 people, many of whom work with British-based operators or firms that are heavily involved in the UK market.
In this respect, it boasts numerous similarities with jurisdictions like Gibraltar and the Isle of Man, but unlike these destinations, its single market access will not be threatened post-Brexit.
Is Brexit the Only Reason for This Exodus?
Of course, if you were to speak to an avid supporter of Brexit, you’d probably hear a completely different perspective on the challenges facing iGaming brands in the UK.
More specifically, issues such as the impending FOBT cap and a 6% hike in the Remote Gaming Duty (RGD) payable by UK firms have also been cited as reasons for operators to restructure their business models.
Both of these legislative changes will come into effect in October this year when Chancellor Philip Hammond unveils his autumn budget. It’s thought that multi-channel operators will be hit hardest by the new laws, as some will see their offline profits slashed by more than 50% whilst also being forced to pay out more in annual taxation.
This will mean that gambling brands based in the UK will face becoming increasingly unprofitable in the future, at least without committing to diversifying their operations or restructuring the business as a whole.
Ultimately, this could mean relocating overseas to a jurisdiction such as Malta, which would enable firms to offset an increased point of consumption levy by securing a favourable base tax rate and reduce their overall operational costs.
Sky Bet chief executive Richard Flint has already hinted at this possibility, whilst previously warning the UK government not to target the iGaming space in order to make up the tax revenue lost through the controversial FOBT cap.
Given that this warning went unheeded by a Conservative government that has hiked the RGD in order to compensate for the future decline in the tax revenues generated from offline gambling firms, we should not be surprised if the current legislative climate in the UK eventually encourages companies to relocate.
With these points in mind, it’s fair to surmise that Brexit is by no means the only factor that poses a threat to the short and long-term health of the UK’s iGaming sector. In fact, the FOBT cap and the 6% RGD hike would arguably be compelling enough reasons for some operators to reconsider their position at the best of times, particularly for multi-channel outlets with a strong offline presence.
However, it cannot be denied that the undefinable threat of Brexit is continuing to underpin negative sentiment in the market, with the loss of single market access potentially devastating to UK firms. Remember, the European market is one of the most progressive and lucrative iGaming spaces in the world, with very restrictions in place in terms of intercountry wagering and collaboration.
At the same time, there’s little no doubt that a no-deal Brexit could serve as a catalyst for significant disruption and change in the UK’s iGaming market, which could manifest itself in the form of a mass exodus of British-based firms.
Reality Check – How Will a No-Deal Brexit Impact the iGaming Sector?
For now, of course, talk of operators leaving the UK and relocating overseas is speculative, especially without any clarification concerning how the UK will eventually exit the EU.
After all, the Theresa May has managed to extend Article 50 until April 12th at least, during which time Parliament will have to either approve her deal or find an agreement that can pass a Commons’ majority. This will then have to be approved by the EU, of course, but this could at least trigger a structured exit or a longer delay to help formalise the arrangement.
If a no-deal does come to pass, however, the notion of operators leaving the UK (or significantly restructuring their business) becomes increasingly likely. In fact, this would arguably prompt a more extreme response from brands, who would most likely cease operating from the UK entirely in a bid to retain single market access and avoid increased taxation rates.
A potential alternative scenario would see iGaming firms move their headquarters directly into the UK, in a bid to negate any future trade tariffs and focus primarily on the British market. This is only really viable for operators whose customer base is dominated by UK citizens, while even then it would make them subject to higher taxation and restrict them from targeting customers in European jurisdictions.
The latter option is likely to prove unpalatable to most, particularly with the aforementioned country of Malta providing a viable alternative for most UK-based operators.
There’s also significant concern surrounding the ability of the UK’s iGaming sector to attract top talent from Europe. At present, the relatively borderless nature of the market in Europe allows Britain to compete for highly-skilled international talent in various high tech areas, but an abrupt end to freedom of movement would largely put-paid to this scenario.
This would result in the UK market becoming less advanced and competitive over time, as Britain becomes disconnected from the European economy and the region’s highly lucrative iGaming sector. At the same time, such a scenario could lead to so-called “brain drain” from the UK, as our own talent looks to relocate overseas so that it can continue to move freely between EU member states (and indeed around the world).
It’s also important to note that securing the best international talent helps to safeguard UK jobs and the industry as a whole, as it contributes to the development of cutting-edge products that boost growth and attract overseas investment.
Make no mistake; Brexit and increasingly stringent tax laws have already undermined the demand to invest in Britain’s iGaming space, and this issue would be compounded further if the market becomes less competitive and loses its access to the very best talent.
Putting No-Deal into Perspective
According to the most recent statistics, iGaming is well on the way to becoming the dominant driver of the gambling industry in the UK.
In fact, the market share of the remote betting, bingo and casino sector increased to 37.3% in the year ending March 2018, with this percentage increased by 3% from the previous years’ figures.
This highlights the rapid and relentless nature of growth in the iGaming space, which remains a considerable contributor to the UK economy and central to the long-term health of the nation’s gambling industry.
This not only underlines the importance of iGaming in the UK, but it also reveals how impactful a no-deal Brexit could be, for the gambling industry as a whole, the British economy and the nation’s labour force.
So, while UK firms have robustly refused to let Brexit uncertainty impact negatively on their bottom line during the vast majority of the negotiations, reality has clearly begun to bite hard as no-deal inches increasingly closer with every passing day.
Rather than risk their ventures being gutted in the event of a no-deal, brands are seriously considering their options and in some instances making plans to either relocate from the UK or reduce its operations on these shores. The RGD tax hike and FOBT cap have also combined to create a perfect storm in the iGaming market, and there’s no doubt that Brexit could be the wind that ultimately brings the house down.