Is Australia’s suitability bar set too high?

By Bill Brown*
Two recent high-profile examples in Australia of deals not proceeding due to regulatory delays raise questions as to whether the approval process is taking too long, or whether the bar is set too high. 
An attempt by Tony Fung’s Aquis Group to buy the Reef Casino Hotel in Cairns failed because Queensland casino regulatory approvals were not obtained in time. The deal was publicly announced in February 2014 and more than nine months later, it lapsed. The reason is that Aquis had not responded to requests by the Queensland casino regulator for interviews and information in a timely way. Notwithstanding this, Aquis ultimately obtained approval to acquire the Canberra Casino.
The second recent example was Genting Hong Kong Limited’s application for approval to acquire up to 25 percent of the shares in Echo Entertainment Limited, which has been with the New South Wales casino regulator for more than two and a half years. The reason for this extraordinarily long time period directly relates to the supply of information, or more correctly, the non-supply of information. 
What is going on here? Do these high-profile examples point to an impenetrable barrier for those who want to invest in the Australian gambling industry? In my opinion, the clear answer to all these questions is firm - No.
Applications of Genting HK’s type in Australia, and similar applications in other gambling sectors (such as electronic gaming machine supply and operation, operation of lotteries and online sports betting services), are strictly governed by legislation. For the most part, the legislative intention is clear – to get the licence or approval, the applicant has to pass a suitability test. The test is usually based on a mix of the following factors, covering not only the applicant but also close associates: good reputation (having regard to character, honesty and integrity); sound and stable financial background; satisfactory ownership structure; suitable financial resources; and sufficient relevant experience.  
The suitability test is usually underpinned by general objectives of the regulatory structure, such as ensuring that the management and gambling operations are free from criminal influence or exploitation and are conducted honestly, and that the operation’s potential to cause harm is controlled or minimized.
Unlike a lot of other regulatory regimes in Australia, gambling regulators are not faced with a time clock when applications are before them. The onus is on the applicant to satisfy the criteria. This is done by the supply of information and is usually done at two stages of an application process. Both stages have their own challenges.  
The first stage commences before the application is submitted and ends at the time it is lodged. A vast amount of information normally has to be collected, collated and sometimes analysed to ensure that the application is accompanied by all the legislative and administrative requirements. These requirements are usually fairly clear and are designed to demonstrate that the legislative requirements are met, including the suitability criteria.  With the right advice, and patience, an application when submitted should demonstrate that the applicant is worthy of the licence/approval. However, the applicant needs to be armed and ready for the second stage.
The second stage is where the applicant, and information relevant to the applicant, is investigated. There may be questions of a clarifying nature. For example, a foreign applicant may interpret a particular requirement in a way that is different to the Australian understanding. A good illustration of this is where the applicant’s understanding of corporate structures and ultimate ownership interests is based on a different legal underpinning. Another good illustration is in the understanding of what amounts to a “close” association.  With the right explanation, delivered in an open way, clarifications should not present a problem
In this second stage, however, the investigation may prompt the regulator to ask for additional information. Often these requests come when the applicant least expects it, particularly after the deep and sometimes confronting collection of information at the pre-lodgment stage. It is also here where the information request can seem unusual and quizzical to applicants not well versed in the Australian regulatory approach. In extreme cases, the applicant can wrongly or incorrectly interpret the request. Again, with the right advice and a necessary degree of flexibility, additional information requests should not be insurmountable.
It is in the second stage where the most frustrating delays occur. In defence of the regulator, it can only base its decision on information supplied by the applicant. If an applicant doesn’t supply what the regulator asks for, the regulator will usually let the application (and investigation) stall. Without a time clock ticking away against the regulator, the only real incentive is on the applicant to comply. Indeed, if there is too much delay, an applicant may have to update or refresh information that has already been lodged. Worse still, reluctance to supply or any hint of defensiveness can take the regulator in another direction completely. In each case, it is likely that there will be additional investigation time, leading to more delay.
The better regulatory approach to this issue is adoption of what I call the “issue of concern” approach. While it doesn’t excuse an applicant from the obligation to supply or divulge information, this approach can particularly help applicants, who are new to the regime, to understand what it is the regulator is getting at. Under the approach, the regulator openly communicates with the applicant (usually through an advisor) the areas of greatest risk or concern and gives an indication of what would mitigate or eliminate it. The applicant is then given time to respond. The approach is an effective way to allay concerns and remove hurdles – on both sides.
How does Australia compare? Most Australian casino laws have their origin in the law of Nevada or New Jersey (or a mixture of both), both of which have a strong suitability element and which have themselves been followed closely by other US states. Singapore’s casino law is very similar to that of New South Wales, again with suitability as a core requirement.  Macau’s casino laws also contain similar concepts. In the Philippines, a key element of PAGCOR’s mission is to preserve the integrity of the industry. It is fair to say that suitability is a common thread running throughout casino (and other gambling) laws in the major regional jurisdictions.
The main difference between jurisdictions is in how the regulator approaches and meets the legislative objective. A deeper analysis of the record of regulators is beyond the scale of this article. My chief contention is that each regulator deals with the issue of suitability in its own way, and each applicant must be flexible to meet that approach to the best of its ability.  Otherwise, as demonstrated by the aborted Aquis tilt at the Reef Casino, success will not follow.
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* Bill Brown is Principal at Orange Advisory Pty Ltd in Melbourne, and an AGB Advisor.