Consumer protection paramount in online gaming regulation

Published in: Latest Intelligence Regulating online gambling would provide significant revenue for Asian governments and boost consumer protection, though enforcing the rules would cause major headaches, speakers at last weekend’s regulatory summit in the Philippines said.
In one of the most hotly debated sessions of the summit, industry experts aimed to address concerns about the impact of regulation and whether making online gambling legal could lead to a spike in addictive behaviour in a region predisposed to gambling.
Sungmin KIM, Commissioner at the National Gambling Control Commission (NGCC) of South Korea, said that the prevalence of problem gambling in South Korea was at least 2-3 times higher than that of other developed countries and was estimated at 7.2 percent in 2012. 
 Total revenue from legal gambling in South Korea reached US$19.2 billion in 2013, with horse racing taking the largest share with $7.54 billion. The lottery and Sports Toto offerings, both of which offer electronic gaming, took $3.16 billion and $2.94 billion respectively.
However, KIM said a university study has estimated the size of the illegal gambling industry at US$66 billion, with 33 percent of all illegal betting (approximately US$22 billion) taking place in the online sphere. Of that figure, 23 percent of illegal gambling takes place on the Internet and 10 percent in private Sports Toto.
KIM said the high percentage of illegal online gambling didn’t surprise him. In 2005 more than 89 percent of Korean households had internet access and online gaming (as opposed to online gambling), is a national obsession with as much as 35 percent of the population playing online games regularly.
Weighing up the pros and cons of online gambling legalization, KIM noted that the pros for government were an increase in tax revenue, social protection, and tracking of players via player cards -- a system the NGCC plans to implement in the legalized gaming industry by 2018. For customers it was a reduction in hassle, while for service providers it was more customers.
The cons were a danger that customers might migrate from legal online games into the illegal market, which offers higher payouts. There is also a fear that a greater prevalence of gambling options will lead to higher problem gambling. KIM also pointed to the danger of minors who may play with stolen adult identities and credit cards.
However, KIM said that the overall contribution of online gambling for Sports Toto is falling. It accounted for as much as 16.8 percent of total revenues in 2011, but in the last two years has dropped back to 12.3 percent. The percentage of young people aged between 20 and 30 betting on horse racing has also decreased, while wagering turnover overall is down, so the impact of legalizing online gambling may be limited.
He acknowledged that it would be difficult to regulate online gambling but that, if it were legalized, the government should ensure firm social protection measures within its policies, terms and conditions and enforce much tighter regulation on the integrity of online gambling to protect its people.
Malcolm Richardson, deputy director of licensing of the Northern Territories in Australia said that history has shown that prohibition does not work, but that the Australian government has other issues on its plate than a review of the Interactive Gambling Act.
Richardson’s arguments for legalizing online gambling were consumer protection, keeping criminal elements out and minimizing problem gambling. He claimed that consumer tastes were changing away from horse racing to football and basketball, and that customers needed product choice so that they did not go to illegal offshore sites.
He said it was an erroneous assumption by politicians that an increase in gambling options leads to an increase in problem gambling and that operators should be obliged to look after the people they serve, though to date they were guilty of not adopting best practice in this area.
Highlighting the high penalties for both offering and taking part in illegal gambling, which were largely ignored, Hilary Stewart-Jones, partner at DLA Piper in the UK, said that the issue was enforcement and who should carry it out. Stewart-Jones said that the police had bigger crimes to pursue with larger financial implications, and that the best way was for tax authorities to seize funds.
She argued that customers simply do not care about the legal status of the online gambling operator, as long as they are winning. The biggest threat from unregulated operators was the lack of recourse when things go wrong.
Stewart-Jones concluded that the way forward was to offer the products that customers want, to educate them about the penalties and risks, and to encourage licensed operators to whistle-blow on their illegal counterparts, particularly as their servers were often based in the same locations.
The next session talked about the grey area between social gaming and online gambling.
Stewart-Jones questioned what constituted a “prize”. Both France and Sweden have determined that “something you aspire to” constitutes a prize. There has also been research on the tradability of virtual currencies showing some teenagers have been making over $20,000 a week.
This demonstrates that the black market has placed a monetary value on these virtual currencies. She asked whether virtual currency should be considered real money and something the financial services authorities should regulate for economic benefit.
The European Commission has decided at this point that social gaming is not yet big enough to be regulated but, if that changed, Stewart-Jones suggested that a point of consumption tax where the customer was based might be a sensible option, bearing in mind that the top social games can generate $975 million in revenue.
One alarming fact that Stewart-Jones brought to light was the amount of anonymous data being gathered by companies offering social games, all of which is collected largely without the player knowing. The data from hours of play is teaching online gambling marketers about what drives a person to play and to spend, and governments should educate consumers about the potential dangers.
Social gaming also brings up cross-border issues, given that it is difficult to regulate a company without an office in your jurisdiction, plus there are questions of grooming and emotional exhortations to play. Stewart-Jones gave the example of Kompu Gacha in Japan, which was closed down by the Japan consumer affairs agency for exploitation of minors. There is now a special agency in Japan that just deals with social games.