Why are Online Operators Really Exiting the UK?

Posted by Harry Kane on Wednesday, October 23, 2019

It seems that every new month now brings a fresh exit from the UK’s iGaming market, with the Malta-based operator ComeOn the latest to close its virtual doors to UK customers.

Now, this makes little sense at first glance, with the iGaming sector having generated a GGY of £5.6 billion in the year ending September 2018 and now accounting for nearly 40% of the UK’s gambling industry.

The UK is also home to one of the progressive regulatory frameworks in the whole of Europe, whilst its operators are also leading the charge to capitalise on growth across the Atlantic.

However, the UK’s iGaming market continues to face a slew of economic, social and regulatory challenges, which have combined to restrict growth and opportunity over the course of the last 12 months. But what exactly are these challenges, and will they lead to an exodus of online casino brands from the shores of the UK?

Which Brands Have Left the UK Market?

The latest high-profile brand to exit the UK is ComeOn, who are based in Malta but have developed a significant presence in Britain since earning a license from the UK Gambling Commission (UKGC) back in 2014.

Having been acquired by Cherry AB in 2017, however, the firm has revised its global operating strategy, having subsequently launched instant casinos in fast-growing markets including Sweden and Germany.

ComeOne has also strived to crack increasingly lucrative and competitive marketplaces in Poland and Denmark, and after a period of introspection the brand decided to refrain from accepting new British customers from September 23rd onwards.

As for existing players in the UK, they’ve been prohibited from wagering through their ComeOn account as of September 27th, whilst the deadline for punters to withdraw any remaining funds from their account came and went on September 29th.

This blanket ban also applies to ComeOn’s sister brand Mobilebet and the online casino platform GetLucky, both of which are now completely inaccessible to UK players.

We’ll delve deeper into the reasons cited by ComeOn and Cherry AB shortly, but it’s fair to surmise that they’re not the first brands to exit in the UK in 2019.

After all, the JPJ Group also announced during the summer that it would be making a swift exit from the UK market, closing down its Vera&John and InterCasino brands in the process.

Some commentators also believe that this represents the very tip of the iceberg when it comes to the potential exodus from the UK market, particularly with rapidly growing entities such as Spain offering a sanctuary and safe-haven to operators.

Make no mistake; Spain is now established as the poster boy for growth in Europe’s iGaming market, having expanded by 20% overall and generated recent profits of €193.25 million.

If we drill a little deeper into these figures, we see that Spain’s online casino betting GCR has seen a rapid increase of 36% in the year ending March 2019. At the same time, the sports betting vertical also grew incrementally by 0.63%, with this trend expected to increase further in the near-term.

This growth has been at least partially driven by recent legislative changes, which have reduced the tax burden placed on operators and increased their bottom line profit margins.

In fact, it slashed its basic tax rate on iGaming revenue from 25% to 20%, whilst empowering semi-autonomous enclaves like Cueta to offer additional incentives to online casino brands.

More specifically, operators that relocate to Cueta can benefit from a reduced tax rate of just 12.5%, whilst the rate of corporation tax payable by brands based in the enclave is capped at 11.8%.

Unsurprisingly, this provides a viable alternative for iGaming operators who are considering exiting the UK, and whilst we’ve yet to see a brand make such a move it’s rumoured that several are currently reviewing their options.

Why Are Casino Operators Exiting the UK Market?

Of course, we’ve already touched on some of the potential reasons that may have inspired operators like ComeOn to exit the UK, with the sustained growth of alternative and less mature markets in Spain, Sweden and Germany certainly increasing the options available to brands.

However, this alone cannot explain just why the UK market find itself in such a precarious and unappealing position. So, here’s a breakdown of some of the reasons why the UK may be facing something of an iGaming exodus:

1. Increased Regulatory Risk and Significant Financial Sanctions

One of the main reasons cited by the ComeOn CEO for their decision to move out of the UK was their desire to “focus on more favourable markets”.

Now, this not only refers to the increased growth in evolving markets such as Sweden, but it also hints at the relative stagnation and regulatory shifts that have impacted on the UK since the beginning of 2018.

For example, the overall GGY for the UK’s gambling industry is thought to have declined by around .04% in the year ending September 2018, and whilst this was largely driven by a decline in offline revenues there were other factors at play too.

For example, although the iGaming GGY in the UK peaked at an impressive £5.6 billion, this value only increased by 2.9% in the year ending September 2018. To put this into context, this sector recorded double-digital growth during the previous 12 months, and was initially expected to do something similar at the beginning of the financial year.

There’s no doubt that this trend has coincided with a change of approach from the UKGC, which outlined its core strategic objective through 2021 last year.

These objectives, which revolved around the protection of vulnerable gamblers and the prevention of gambling-related harm in society, have compelled the regulator to impose stricter rules on operators, and this has led to several large financial penalties being afforded to those that fail to comply.

This resulted in UK betting companies paying a record £19.7 million in fines in 2018, primarily for continued failures to protect problem gamblers and prevent money launderers from wagering questionable cash.

This sum comprised of fines paid by nine operators, with £13 million going to the UK Treasury and a further £6.7 million being paid to compensate customers and any other affected parties.

In one instance, the online casino brand Daub Alderney paid a hefty £7.1 million fine for offenses pertaining to both anti-money laundering and problem gambling regulations, with this being the second biggest penalty of its type since 888 were sanctioned to the tune of £7.8 million for similar offenses in 2017.

This year marked a slight increase in the total fines paid by UK operators, up from the £18.4 million paid out during the previous 12-month period. Conversely, operators paid just £1.7 million in cumulative fines throughout 2016, highlighting the considerable challenges facing brands in the current regulatory climate.

Make no mistake; iGaming in the UK remains an incredibly mature and highly competitive market, and one where the financial risks are high for operators.

After all, we’ve seen some established and reputable firms sanctioned for non-compliance in recent times, which suggests that even large and well-resourced operators are struggling to transition to the new rules and regulations.

With these points in mind, it’s little wonder that ComeOn and their parent company Cherry AB are baulking at growing uncertainty and the risk of future sanctions, even though they’ve managed to avoid being punished so far.

This climate of uncertainty is also being exacerbated by the introduction of increasingly stringent regulations being imposed in the offline gambling space, with the controversial FOBT cap having been rolled out belatedly in April.

With the maximum threshold for FOBT wagering now having been slashed from £100 to just £2, a number established and multi-channel operators have announced plans to close various offline outlets whilst seeing their revenue and share value plummet.

Ladbrokes has pledged to close up to 1000 stores nationwide, for example, which will reduce their overall offline presence by almost one-third.

In a similar vein, fellow behemoth William Hill has announced the prospective closure of around 700 stores, with this decision placing 4,500 jobs at risk.

Clearly, this tougher regulatory stance is impacting directly on operators and creating a diminished level of sentiment in the marketplace, compelling some companies to reconsider their position in the UK and seek out higher-growth and less mature alternatives.

2. The Rising Online Tax Burden

Whilst it was the government’s own Department for Digital, Culture, Media and Sport (DCMS) that recommended the FOBT cap, there’s no doubt that the UK Treasury will suffer from this decision in the form of reduced tax income.

However, the Tory government was quick to recoup some of this lost revenue by introducing an unexpected hike to the Remote Gaming Duty (RGD) paid by online operators in the UK.

More specifically, the rate of RGD will increase by 6% as part of the Chancellor’s autumn budget in 2019, rising from 15% to 21% in the process.

Offshore brands operating in the UK will also be taxed an additional 6% on their virtual GGY, and some commentators believe that this will serve as a catalyst for businesses to leave the UK market in the current climate.

This seemingly punitive measure must also be considered in the context of the external European market, with legislative changes in Spain meaning that this jurisdiction is now charging a lower rate of tax than the UK.

This is creating something of a perfect storm in the UK, and it will have undoubtedly played a role in encouraging brands such as ComeOn to switch their focus away from Britain and strategically target brand new markets.

The challenge may be even greater for aforementioned multi-channel operators including Ladbrokes and William Hill, as these companies must contend with an increased rate of online tax whilst also shrinking the size of their offline business.

This will create a scenario where the market leading iGaming brands will have their margins squeezed both on and offline, so it’s little wonder that smaller operators are seeking fight rather than face the prospect of becoming unprofitable.

3. Brexit

Of course, no article of this type would be complete without reference to Brexit, which is underpinning all of the uncertainty and volatility that has gripped the iGaming market in recent times.

Make no mistake; Brexit poses various challenges as an overarching concept, starting with the how the nature of their exit (which has yet to be fully determined) will impact on the rights of European residents who are actively involved in the iGaming market either as customers or employees.

Another key issue is the ability of UK operators to forge casino and poker liquidity pacts with their European neighbours, as this represents a viable and popular way of increasing turnover and profitability through collaboration and shared access to technology.

Back in January, France, Spain and Portugal celebrated a successful first year of cross-border shared liquidity in Europe, which has seen the online poker market grow across all three nations and laid the foundation for further collaboration in other iGaming verticals.

The countries involved have also opened up the door to other EU member states to join this pact, and this is an opportunity that the UK will be unable to accept once they’ve finally left the single bloc.

So, whilst Italy have failed to seize this opportunity despite being an original signee of the European liquidity pact in 2017, there’s the potential for progessive markets such as Sweden, Bulgaria and Germany to participate going forward.

Of course, it can be argued that the UK may be able to seek out similar liquidity sharing pacts in the U.S., but these plans have been dealt a blow by the Department of Justice’s (DOJ’s) decision to revise its opinion on the 1961 Wire Act.

This once again extends the remit of the Wire Act to include online casino gameplay, creating a scenario where interstate gambling becomes increasingly unlawful.

On a final note, it’s also fair to surmise that British Overseas Territories will take a significant hit in the wake of Brexit. Including jurisdictions such as Gibraltar and the Isle of Man, these locations are home to a number of British iGaming brands, each of which could be negatively impacted in the event of a disorderly, no-deal Brexit.

This represents a major concern for operators, and there’s no doubt that Brexit (particularly a no-deal exit) remains a key catalyst for brands who are considering leaving the UK market. However, it’s the combination of these factors that’s having the biggest impact on the UK marketplace, and this is something that needs careful consideration going forward.