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Nick Poyntz-Wright: We regulate and supervise spread betting firms more generally, and we have certain standards to which we require those firms to adhere. In conjunction with the Gambling Commission, we have looked closely at how those requirements might align with what the Bill requires, but clearly right now the supervision regulation of those spread betting firms is outside and comes to us. So we are interested in making sure that there is alignment and that standards are upheld in a consistent way.
Helen Roberts: We have been in written communication with the Sports and Recreation Alliance, whereby we have talked about developing greater consistency between us and the Gambling Commission. In fact, we received a letter from them on Friday, requesting a meeting that we will be looking to action.
26 Clive Efford:
What I am trying to get a feel for is whether this is really high on your set of priorities, that you would put a lot of resources into monitoring what is going on in the sports betting that you regulate?
Nick Poyntz-Wright: In the way that we carry out our regulation, we take a risk-based approach, so that does not necessarily mean that we follow the weight of numbers—it will depend on our view of the level of risk in a particular part of the market. Having said that, we also need to bear in mind that the actions that we take need to be proportionate and, clearly, it is only a minor number of firms relative to the whole spectrum of what the FCA oversees.
27 Clive Efford:
I have a letter here from March 2011 from the then Economic Secretary to the Treasury, the right hon. Member for Putney (Justine Greening). She said that the Government believed that the FSA ought to use its powers to impose part of the process of authorisation and that the FSA was the most appropriate body to regulate spread betting. Can you tell me what has changed since that letter was written in March 2011, specifically in relation to regulating spread betting?
Nick Poyntz-Wright: Perhaps I can start by saying that, in terms of financial regulation in the UK, a great deal has changed. As you say, the FSA was our predecessor organisation, and it has now been divided into two separate regulators, of which the FCA is one. That took shape on 1 April 2013.
On the specifics of how we have looked after spread betting, I am happy to talk about how that is now operating under the FCA, if that would be helpful.
Nick Poyntz-Wright: As you are probably aware, we have been given a number of statutory objectives, and we are required to try to ensure that they are achieved. Essentially, there are three operational objectives: one is on consumer protection; the second is on the integrity of financial markets; and the third is on competition. When we exercise those objectives in supervising firms, included within which are the spread betting firms, we think about the risks that they may potentially pose to those objectives.
We take a risk-based approach to what we do. There are three different ways in which we operate that supervision. We operate it at the individual firm level, so we routinely take steps to look proactively at how the firms are operating and what they are doing through the lens of whether they are ensuring that consumers are protected and getting what they have been led to expect.
The second approach is across sectors, so we look at the risks and issues that we can see presenting themselves in a particular sector of the market, and we might undertake a project-based approach to tackle that risk across a number of firms and, in some cases, across a whole sector. The third way is when events occur. Obviously, from time to time, events will occur that come to our attention through the intelligence that we gather, and we respond to those events.
We have that three-pronged approach, part of which is designed to ensure that we are more proactive in identifying the emerging risks, rather than waiting until damage has occurred.
Nick Poyntz-Wright: Of the 25 spread betting firms, there are two that conduct sports spread betting, and we have informal arrangements with them to ensure that, where they identify signs of suspicious activity, they talk to us. We also have an information gateway, as it is known, to the Gambling Commission, through which we are able to pass on that information and share it with the commission, where appropriate. We have been looking into the actual use of that gateway, and we have identified that it has been used in the past, although not very much.
29 Mrs Grant:
On the same point, you say that there are informal arrangements in place with the two operators offering sports spread betting. Have you any plans to underpin those informal arrangements with any form of guidance to strengthen and tighten them? The arrangements are obviously working but we want to make sure.
Nick Poyntz-Wright: What we do have is certain requirements placed upon firms to notify us in certain events. That is the first thing to say; the requirements are there. We believe that provides some protection to ensure that the flow of information, in terms of potential suspicious activity taking place, is actually coming through. So those requirements are there but it is fair to say in this particular case—not least because there are two firms operating in this area and we have been in discussion and liaison with the Gambling Commission—we have decided to have dialogue with the firms and with the Gambling Commission to ensure that the informal arrangements are there, but they are underpinned by requirements within our supervision manual.
What you might be alluding to is: should there be more? Could we be clearer in terms of the requirements that are on these particular firms in this particular segment of the market? We are actively considering whether it would be appropriate to give guidance to those two individual firms, which makes absolutely clear what we are requiring them to notify us of. And through the information gateway that I mentioned, once we receive that information we would then have an arrangement with the Gambling Commission to pass that information on.
Nick Poyntz-Wright: I do not know whether Helen Roberts wants to add some detail, but to begin with, as I said, we have a whole overarching regime of regulatory requirements placed on the firms that we authorise. In the main, those requirements would apply to all firms. Sometimes there are some sector-specific requirements, but the notification requirements I referred to earlier are generic, so they operate across the 26,000 firms that we supervise. In respect of the detail around 15.1, this is something that we have been discussing with the Gambling Commission, because we are sensitive to the fact that we would like consistency and we would like them to align. Helen, I do not know if you would like to add anything on the detail.
Helen Roberts: The difference between 15.1 and our supervision requirements is lies in materiality. So our requirements are for the firms to notify us of, for example, fraudulent activity, but it is where it has a significant impact. The benefit in perhaps providing some additional guidance might be around the level to which suspicious activity is notified to us. We are generally content that the requirements are there, and with this extra bit of guidance—if we go down that route—there would be no need to adopt 15.1.
31 Clive Efford:
Condition 15.1 requires the operators to notify the sport’s governing bodies, to share information with them if they suspect that there may be some suspicious activity relating to their sport. If you are not talking to the sports, how do you know whether the activity has significant impact or not?
32 Clive Efford:
So we have a regulatory regime for spread betting, but if we were to suggest it for remote gambling—that is, only the operator will determine whether there is a significant impact, which is basically ad hoc self-regulation—we would be quite rightly lampooned as regulators. Why should we tolerate that with spread betting?
Nick Poyntz-Wright: I don’t think it is right to regard it as ad hoc. These are very specific requirements. Obviously, it is the firms themselves operating the spread betting that are the first, or very often the first, to hear about or gather the information. So what they are required to do is to assess whether that information gives them reasonable grounds to think that there might be fraudulent activity going on. In that instance, they are required to notify us.
I mentioned earlier that we have these different cycles and approaches to supervising the firms. We will have a rolling programme—first, of looking at the firms themselves over a period. We may well look at their procedures and how effective they are at notifying us if those events may have occurred. How did they judge whether it was appropriate to notify? Similarly, on the sector-wide risks we may identify, we may look at that across the market, perhaps comparing and contrasting with the other spread betting firms. There is a routine and a process around that.
Helen Roberts: For sport spread betting, we have a detailed set of rules that applies to all investment activity, whereby the adverts are required to be fair, clear and not misleading. There are lower-level rules that underpin that. One thing I do know is that we proactively monitor advertising. That is done on a weekly basis and regularly includes sport spread betting firms. Such adverts are very prevalent in the marketplace, particularly because they tend to market on specific sporting events, so new adverts come out on a regular basis. We check them to see that they are compliant and, where they are not, we take action against the firms.
Nick Poyntz-Wright: Perhaps I can start; you might want to add to what I say, Helen. We have requirements on firms to assess whether the products that they are offering are appropriate for the client. Essentially, what that means is that the firm needs to determine the level of knowledge and level of experience of the client regarding the particular product that it is selling. That is a generic requirement, which clearly also applies in the investment markets, but the appropriateness test is particularly important. Helen, do you want to add anything?
37 Clive Efford:
Well, in the evidence from Jenny Williams, the chief exec of the Gambling Commission, she clearly suggested that there was a great deal of under-reporting going on in the areas of the gambling industry where the Gambling Commission does not license. For the 80% of the market that it does not regulate, she said that there had been 10 reports that she was aware of since 2007 and she suggested that—these are the words of the Select Committee report—
“it was implausible there were so few suspicious transactions.”
Does that not seem to apply to spread betting as well?
Helen Roberts: It might be worth noting as well that we have a whistleblowing hotline that is open to members of the public or anybody if they have suspicions, not just in relation to spread betting but generally. Then we investigate those where they are notified. Indeed, we would log them on shared intelligence systems, which the Gambling Commission and other regulators have access to.
39 Clive Efford:
It would be nice if you could let us know, as it would be useful. If we have a system that is heavily reliant on the operator fessing up to this suspicious activity, inevitably there is going to be an under-reporting of it. Is that not likely to happen?
43 Clive Efford:
Well, we are two and half years down the road. You can go and look into it and by all means let us know, but there seems to be a lack of urgency across this industry. The Minister referred earlier to consistency. There is a gaping hole: the regulations relating to spread betting. You are not filling me with confidence that you feel that urgency.
Nick Poyntz-Wright: I am sorry that you are not getting the confidence. We are absolutely concerned to ensure that the firms are operating the spread betting activity effectively, safely and appropriately. That is going back to our objectives of consumer protection and market integrity. So there is every intention to ensure that happens. We have been in discussion over that period about how we get clear consistency and alignment, despite the fact that, as you have pointed out, the copy-across of 15.1 has not precisely occurred. We are confident with the two firms concerned here, and also with the Gambling Commission, that as far as we can reasonably tell that is working effectively.
44 Clive Efford:
Will you explain to me what your role is in monitoring performance, particularly of the spread betting operators? Is there any form of investigation that you undertake to ensure that they are informing you of any irregular activity? What kind of enforcement do you undertake?
Nick Poyntz-Wright: This is what I am saying. We have the three approaches. One approach that we would take is that on a regular basis, for each individual firm that we regulate and supervise, we will look at what risks they might present to the achievement of our objectives. In this case, that would be consumer protection but also market integrity. Any hint of fraudulent activity would play to the market integrity objective. We do a review, which is a risk-based review according to the size and shape of a particular firm, where we would look at that periodically for each firm. We would look at how they operate and think about where the risks might lie. Clearly, with these spread betting firms, which would include those firms that are facilitating spread betting on financial indicators, the risk around suspicious betting activity and fraud would be high on the list of risks we might consider.
Nick Poyntz-Wright: There are two things that are relevant. Beyond that we perhaps did not come ready with the answers to that question. The first thing to say is that one particular strand of activity that we have, thinking particularly about financial markets and market abuse, entails screening large numbers of transactions to see where there might be abuse in that respect. The second area is looking at the individual firm level. However, I do not know whether any consideration has been given within the FCA to blocking financial transactions.
What we could do if we believed that a firm was not exercising its responsibilities appropriately is to vary the firm’s permissions to conduct certain types of activity. That would obviously be if we had real concerns about the firm’s ability to conduct spread betting, for example. We could require their permissions to be varied, which would mean that they would have to stop. This would stop that particular activity—that is, spread betting—entirely, but would not be for one particular transaction or client.
Nick Poyntz-Wright: No, they are absolutely not. As Helen or I explained, we require firms to notify us in certain events, including if there are reasonable grounds for them to suspect that significant fraudulent activity is going on. In this particular instance, because of our discussions and interactions with the Gambling Commission, among other stakeholders, we decided that it would be worth engaging these two firms—bearing in mind that there are only two—to put these additional arrangements in place. As we covered earlier on, we are considering whether to formalise those discussions. We have no reason and we have gathered no evidence to tell us that they are not working effectively. However, we could put them in the form of guidance, which would be a requirement on the firm to operate in that way.
49 Clive Efford:
We heard from Tim Lamb earlier. He is concerned about the impact of spread betting. His concern was that there is no requirement on spread betting organisations to share information. Therefore, inevitably, there would be no evidence of any irregular activity. What is your response to their concern that there is a complete lack of information, which leads to a complacency that endangers our sports governing bodies?
Nick Poyntz-Wright: I do not accept that there is complacency. Certainly the discussions that we have had with the firms do not suggest that. There are requirements on the firm to notify us in certain situations. My colleague Helen indicated that the requirements that are there require a degree of certainty and significance of those events. We wanted through the arrangements to strengthen that and we are considering doing it through guidance.
Helen Roberts: We have been in dialogue with the firms, and only last week we had a discussion with one of them about this and the extent to which they are looking. They have stated that they are not aware of any suspicious activity at this time and therefore they have not notified us. They have said that they have engaged with the Gambling Commission on a couple of occasions about fixed odds issues, but not about sports spread betting.