Betting Exchanges†_x0013_ a brilliant innovation or an invention destined to cause the demise of horseracing as we know it?

Of course, it depends who you talk to because Betting Exchanges appear to polarise people’s opinions to the same extent that I appear to have done during my Chairmanship of the British Horseracing Board!

Among those who think Betting Exchanges are just great are, first and foremost, punters who, less than two years ago, were getting 77% of their stakes back in winnings. They thought their Christmases had all come at once when, in October 2001, Government replaced General Betting Duty with Gross Profits Tax and they jumped to the top of the World League of Lucky Punters as they suddenly found 87% of their stakes being returned by the bookmakers. But, if anyone had predicted two years ago that in 2003 punters would be getting 97% of their money back, they would have been locked up. Yet that is precisely the Utopia in which punters who are using Betting Exchanges now find themselves.

Government must come a close second among Betting Exchange admirers since they have recommended that Betfair be given a Queen’s Award for Enterprise, have declined to ask the Crown Prosecution Service to obtain a legal ruling on whether layers on Betting Exchanges fall within the definition of bookmakers under Section 55(1) of the 1963 Betting Gaming and Lotteries Act and have indicated that, even if a court found that recreational layers on exchanges require a permit under the current law, they will ensure that they do not require a permit in the new Gambling Bill.

Surprisingly, the Jockey Club must also be counted among their supporters since it has endorsed Government’s plans for the future regulation of exchanges and believes that the Memorandum of Understanding reached with Betfair and Sporting Options in June this year, which enables the Jockey Club to ask for, though not necessarily to receive, information on betting activity on horseracing in Britain, including the identity of individuals using the exchanges, represents a significant advance in its ability to protect and maintain the integrity of horseracing.

And finally, the Levy Board, or at least its Government-appointed Chairman and two independent members, appears to be firmly in the camp of the Betting Exchanges, based on their decision to allow on-course bookmakers to hedge into Betting Exchanges.

In the opposite corner, the off-course bookmakers clearly do not have Betting Exchanges on their Christmas card list, arguing that they are not operating on a level tax, levy or legislative playing field, that layers should have bookmaking permits and that, at the very least, on-course bookmakers should only be allowed to hedge into exchanges with other permit-holding bookmakers.

Most on-course bookmakers don’t like Betting Exchanges either. They also cite the unlevel playing field as their reason for not wanting to hedge into exchanges, fearing a flight of liquidity from the on-course market.

British Racing has also been portrayed as anti-exchanges and it is unarguable that British Racing is the worst sufferer financially as a result of their emergence. Punters are betting more on British horseracing but losing less on it. However, punters are losing more in total which can only mean that their money is being recycled into other products and bookmaker profits are unaffected.

Although British Racing has yet to form a united view on exchanges – no surprise there! – other major racing nations firmly believe that Betting Exchanges have absolutely no place in horseracing.

The Hong Kong Jockey Club has stated its belief that the integrity risks associated with Betting Exchanges ‘cannot be eradicated by regulation’. The Report of the Betting Exchange Task Force to the Australasian Racing Ministers’ Conference – a 400 page document – concluded ‘After weighing the evidence, the Task Force concludes that presently no cost-effective, practical package of tested measures has been identified to deal comprehensively with valid concerns regarding threats to racing integrity arising from Betting Exchange operations’.

The Task Force further concluded ‘Betting Exchanges on Australian racing would pose a serious threat to current betting turnover levels of the three categories of licensed wagering operator in Australia – TABs, traditional bookmakers and corporate bookmakers’.

So, who is right? The pros or the antis? The pros accuse the antis of having a vested interest in the demise of exchanges. Betfair, and some racing journalists, even accused George Howarth of having a vested interest in trying to get the Treasury to change the tax basis for exchanges. The truth is that both the pros and the antis can be accused by cynics of having vested interests in their positions – exchanges because they want to make money, punters because they want the best deal, Government because there are votes in punters, bookmakers because they want better margins and racing industries because they want bigger levies.

This brief summary of the pros and the antis does however demonstrate that there are clearly some concerns about Betting Exchanges. But before proposing solutions to the problems that Betting Exchanges present, I would like to examine with you what I regard as the four most important issues on the subject:

First, how should Betting Exchanges and their customers be characterised under the UK’s gambling laws?

Second, do Betting Exchanges pose a threat to the integrity of British Racing and sport in general?

Third, how should Betting Exchanges be regulated?

And finally, do Betting Exchanges pose a threat to the finances of British Racing and to Government revenues?

Let us look first at how Betting Exchanges and their customers appear to be characterised under the UK’s present gambling laws.

Taking the Betting Exchanges themselves …. are they bookmakers? Under the 1963 Betting Gaming and Lotteries Act, the answer clearly is NO, for to be a bookmaker under Section 55(1), you must be a person who either ‘on his own account or as servant or agent to any other person, carries on, whether occasionally or regularly, the business of receiving or negotiating bets’; or who ‘by way of business in any manner holds himself out or permits himself to be held out as a person who receives or negotiates bets’.

Betting Exchanges quite simply do not ‘receive or negotiate bets’ nor do they ‘hold themselves out as persons who receive or negotiate bets’. Therefore they cannot be bookmakers under the definition of the 1963 Act.

This is indeed the view as expressed by Betfair – but only when it suits them. When Nigel Smith, BHB’s Commercial Director, tried to negotiate a data licence with Betfair similar to that with the off-course bookmakers, Betfair was at pains to point out that it was not a bookmaker.

If it is not a bookmaker according to the law of the land, why then does it hold an official Bookmaker’s Permit obtained from a local magistrate? And why has it recently been granted a seat on the Statutory Bookmakers’ Committee?

I can think of only one reason why Betting Exchanges are happy to be treated as bookmakers – when it suits them – and that is because they realise that they would never be allowed to flourish unless they make some financial contribution to horseracing and government revenues – albeit it’s only a relatively small one – and that, unless they contribute as exchanges masquerading as bookmakers, the spotlight would fall on their customers as being the ones who should be treated as bookmakers. A scenario which would make them extremely unpopular with their customers.

I think it is pretty clear that whether they hold a Bookmaker’s Permit or not, and whether they sit on the Bookmakers’ Committee or not, Betting Exchanges are not bookmakers under the 1963 Act. Yet the Betting Exchanges seem to have persuaded DCMS, the Levy Board and the Treasury that they should be treated as bookmakers.

But what about their customers – the layers and backers? Surely if they operate through Betting Exchanges there must be some betting going on, and in most people’s minds, where there’s a bet there’s a bookmaker. Surely then, the layer on the exchange – who accepts bets just like a traditional bookmaker and pays out to winning bettors just like a traditional bookmaker, must be a bookmaker under the 1963 Act?

Apparently not either. Why? Because it’s not sufficient just to lay bets to be deemed a ‘bookmaker’ under the 1963 Act.

You also have to ‘carry on, whether occasionally or regularly, the business of receiving or negotiating bets’ or ‘by way of business in any manner hold yourself out, or permit yourself to be held out, as a person who receives or negotiates bets’.

Betting Exchanges argue that their layers who do not already hold bookmakers’ permits are recreational punters because they do not ‘receive or negotiate bets as a business’ and ‘do not, by way of business, hold themselves out as persons who receive or negotiate bets’. That is almost certainly why the Betting Exchanges insist that the identity of backers and layers is concealed from those with whom they bet despite the increased threat to integrity from such concealment. After all, there is a ready defence to the charge that you are ‘holding yourself out’ if you are anonymous.

But aren’t the distinctions drawn by the 1963 Act being held up to ridicule by modern technology? Jeffrey Bernard, a compulsive punter, was put in jail for sitting in a pub and laying bets to the pub’s customers. Presumably because he was ‘holding himself out as a person who receives bets’ rather than remaining anonymous and because a magistrate decided he was conducting his laying ‘as a business’ without a Bookmaker’s Permit. But if he’d layed the same bets today on a Betting Exchange, and a few more besides, he’d have been contributing towards the achievement of a Queen’s Award for Enterprise.

It seems that if a person wants to lay horses anonymously on a Betting Exchange, frequently and for considerable sums, his chances of being required to obtain a Bookmaker’s Permit are almost nil providing he remains anonymous, keeps his account topped up and can argue, if he is ever challenged, that he is not in business.

But if he wants to lay bets recreationally and advertises his name, address and phone number in a newspaper he will almost certainly be required to obtain a Bookmaker’s Permit on the grounds that he is ‘holding himself out as a person who receives bets’.

So, why would anyone want to hold a Bookmaker’s Permit? Why not simply ‘retire’ and play the exchanges, just like the stock market? Trade in bets instead of stocks. After all, there’s no capital gains tax, no gross profits tax, no income tax and no levy on the Betting Exchanges. You only pay gross profits tax, income tax and levy if you’re stupid enough to hold a Bookmaker’s Permit.

Surely this is a ridiculous state of affairs and one which I cannot believe the Government in 1963 intended to create or would have created if it had known of the emergence of Betting Exchanges. For it has created a policy through statute where those who are not bookmakers are being treated as bookmakers and those who are arguably acting as bookmakers are easily able to categorise themselves as recreational punters.

There is no doubt that the 1963 Act did intend to exclude from bookmaking private wagers between two people. But in 1963 almost the only private wager you could have was with a friend or family member and the Act rightly did not want to make a private wager between friends a criminal offence. For not only was such a wager clearly recreational but it had no potential danger to the integrity of the sport, about which I shall say more shortly.

Technology and the ability to remain anonymous has blurred the boundaries between recreation and business, as I hope I have shown, and it is critical therefore that the new legislation draws a readily identifiable distinction between a private wager of the type intended in 1963 and other forms of laying where there is a real risk to integrity.

Let’s turn now to the whole issue of integrity as it relates to Betting Exchanges. The Jockey Club seem to think that the risk to integrity is either minimal or that strengthened regulation can counteract whatever increased threat is posed.

I’m afraid I do not share this view. Why not? For two very clear reasons. The first is best illustrated by the Western Australian Racing Minister, Nick Griffiths, who said recently: ‘Betting Exchanges create a substantially new type of betting contingency – the capacity to bet that a particular horse will not win. The ability to lay bets through exchanges and thereby profit from a horse losing can be seen to carry with it a real temptation for owners, trainers, jockeys, stable staff and others close to the industry to compromise the integrity of racing. They have the facility not only to lay runners but also to do so anonymously, making it impossible to trace the origin of bets’. To the word ‘temptation’ Mr Griffiths could easily have added the word ‘opportunity’ for there is a strong correlation between the ‘level of opportunity’ and the ‘risk of temptation’.

Let me put it another way. Betting Exchanges have, for the first time ever, suddenly and immediately enfranchised 30 million plus people in Britain to make money out of horses losing races. Previously there were only 3,791 people – the number of on and off course bookmakers with permits who had passed the fit and proper person test – who were so enfranchised. But when you add to that 30 million figure every other person in the world with the desire to make money out of horses in Britain losing races†_x0013_ including, possibly, Brian Wright in Cyprus, illegal Far East bookmakers and even organised crime†_x0013_ you have to wonder whether the decision was reached after appropriate research and analysis.

I find it impossible intellectually to disconnect the spectre of hundreds of millions of people throughout the world enfranchised to make money out of horses getting beaten on British racecourses, from the spectre of diminished integrity, increased criminality and, ultimately, loss of punter confidence and its consequences. I cannot believe that anyone in this room can put their hand on their heart and say they disagree with that sentiment.

The second reason why I do not share the optimism of the Jockey Club about the impact of Betting Exchanges on integrity is the increasing number of suspicious incidents which are taking place.

Clive Reams, former Chief Executive of the National Joint Pitch Council and now Managing Director of Racefax, claims that there has been a significant increase in the number of races which have returned suspicious betting patterns on the exchanges. Reams recently stated ‘I have trailed over 200 horses which have looked ominous from early morning and there is no question that in 96 cases these horses have underperformed by a significant margin compared to the Time Line analysis. This under-achievement is coupled with a market drift on the exchanges that has a very distinct and identifiable pattern. The indication is that certain owners, yards and jockeys occur more frequently than you would expect on a pro-rata basis’.

Reams continues: ‘I remain very concerned that the current crop of incidents continues unchecked. The unusual betting patterns on Nimello and Hillside Girl caught the attention of the betting public but I can assure you that they are merely the tip of a growing iceberg’.

The actual incidents that have received media attention bear repeating: Royal Insult who drifted from 9-2 to 49-1 on the exchanges before breaking down at Lingfield last December after suffering a serious shoulder injury; Nimello who drifted from 6-1 to 32-1 before finishing lame at Salisbury; Hillside Girl who drifted from odds on to 21-1 before pulling up after two furlongs; Hawk Flyer who pulled up lame on the gallops and was pulled out of the St. Leger later that day but not before he had been layed from 9-2 out to 42-1 on the exchanges; Legal Set who drifted from 9-4 to 4-1 before, according to the Racing Post, ‘being given too much to do’.

The Hillside Girl incident had an added twist. The farrier who shod her had allegedly lost over £100,000 when he laid another horse the week before. I didn’t realise that being a blacksmith was such a lucrative occupation.

All these incidents, many of which raise serious issues of horse welfare, occurred up to nine months ago and have all been investigated by the Jockey Club. But so far we’ve heard nothing about the findings in any of these cases. Why not?

This raises the question as to who is policing the various elements of the exchanges. Government has made it clear that it is not their responsibility and that they must depend on the regulator for advice as to what is the extent of the integrity risk; the Jockey Club, who have finally banned jockeys, trainers and now owners, after a volte face, from laying their own horses on exchanges, claim that the exchanges have been reporting betting patterns which they consider abnormal, though we have not been told how many have been reported, how many have been investigated by the Jockey Club, and how many have been referred to the police.

What we do know is that there is a sophisticated monitoring service which can provide the Jockey Club with an early warning system, an analysis of past trends and data from which Racing’s regulator could better assess the risk to Racing’s integrity from Betting Exchanges. This service was offered to the Jockey Club over a year ago but the offer has not been taken up. It is hard to believe, in the light of the critical Security Review Report which made it clear that the Security Department of the Jockey Club lacked betting expertise, that this function is being carried out satisfactorily in the light of Clive Reams’ comments.

We have also not been told what, if anything, Customs & Excise is doing to ensure that all exchange account holders who do not have bookmaking permits are rightfully operating without such a permit.

It would be easy to conclude that not a lot is being done by anybody which, given the seriousness of the potential threat not only to Racing’s integrity but to the integrity of many other sports, is worrying indeed.

As far as regulation of Betting Exchanges and their customers is concerned, the situation is also far from satisfactory. There is no reference to either spread betting or Betting Exchanges in gambling legislation yet spread betting is regulated by the Financial Services Authority – the FSA – and Betting Exchanges are not, despite the fact that the FSA supervises other exchanges where it conducts market surveillance and reduces financial crime by focussing on money laundering, fraud and dishonesty and criminal market misconduct such as insider dealing. Betting Exchanges instead are effectively self-regulated or unregulated depending on your view of the facts.

Government’s approach to the future regulation of Betting Exchanges also leaves room for concern particularly its statement that ‘there is no risk of harm to the public from an exchange user’. Those who backed Hawk Flyer on the morning it pulled up lame on the gallops and for the next few hours was being layed from 9-2 out to 42-1 would probably disagree. What regulation protected them?

Government believes that the responsibility for tackling regulation must fall primarily on the sport and its regulator but there are many who think there aren’t enough policemen in this country to control 30 million adults. So how can the Jockey Club, with its tiny resources, be expected to police the same 30 million adults – and the rest of the world – who have been enfranchised to make money out of horses losing races?

The final issue relating to Betting Exchanges that I would like to examine with you is their impact on Racing’s finances and Government revenues.

Let’s look first at Racing’s finances. When the Secretary of State determined the 41st Levy Scheme in March 2002 she declared that she believed the Levy could amount to between £90 million and £105 million; the Levy Board itself estimated £97 million. In fact it came in at £78 million, some £19 million or 20% below the Levy Board forecast.

There is no disputing the level of shortfall in Racing’s income; the only matter of dispute is the cause of the shortfall. As can be expected, the Betting Exchanges and the Levy Board, who introduced the rule that allows on-course bookmakers to hedge into exchanges, argue that the cause of Racin?_x0019_s loss of income has been the roll-out of Fixed Odds Betting Terminals and the shift of punters to backing short-priced favourites. Traditional bookmakers, on the other hand, are in no doubt that Betting Exchanges are responsible for the drop in income.

I am quite sure that, in this case, the bookmakers are correct. Common sense can lead to no other conclusion. Let me explain why.

The most significant impact on bookmaker gross profit – assuming that over a long period results even themselves out – is the theoretical overround per runner. It takes less than a 7% drop in overround per runner (for instance from 1.9% to just 1.77% per runner) to reduce bookmakers’ gross win profits by over £150 million a year with the commensurate impact on Racing’s income and Government’s revenues.

It is a fact that overrounds per runner have decreased and continue to decrease for the simple reason that on-course bookmakers can hedge back into exchanges and offer on-course punters longer odds than they would have been able to if exchanges did not exist. Part of the reason that exchanges can offer better odds is because they are neither taxed nor levied on an equal footing with traditional bookmakers.

It is estimated that exchanges will match around £4 billion this year. Regardless of their impact on bookmaker gross profit margins, which resulted in a revenue drop to Racing of almost £20 million last year, let us look briefly at the impact of turnover moving to Betting Exchanges from Licensed Betting Offices or from other traditional bookmaking outlets such as credit or internet betting. For every billion pounds bet in an LBO, Racing receives £14 million; for every billion bet on credit or through the internet, Racing receives over £7 million; but for every billion matched on the exchanges we estimate Racing receives only around £1 million.

If these income losses seem dramatic it is because they are. And whatever the extent of Racing’s losses, Government’s loss is 50% greater because Government operates on 15% of gross profits compared to Racing’s 10% of gross profits. And, when you take sports betting into account, Government’s loss is even greater.

If this is the way forward for Racing’s income stream from betting, someone had better come up with some ideas pretty quickly on how British Racing is going to finance itself under this scenario.

But the method of taxing exchanges on a percentage of their commission needs to be better thought through by both Government and the Levy Board. For the commission rate is set by the exchange and, although we hear all the denials about certain customers being offered a nil commission rate, there is one very simple way for an exchange operator to reduce Racing’s and Government’s revenues from exchanges to zero.

All they have to do is eliminate commission charges to their customers and charge a subscription fee to each customer with or without a percentage of any money the layer withdraws or deposits to his account. Since no commission is being charged, there would be no tax and no Levy payable.

It is hard not to conclude that there are unresolved issues relating to Betting Exchanges. The issue of their legality has been left in limbo; the status of what constitutes bookmaking remains unresolved; the correct nature of their regulation seems to be unclear and the plans for regulating them even less clear; their threat to integrity has not been properly reviewed; their impact on Racing’s finances has been ignored by the Levy Board and the charging mechanism by which revenues are raised by both the Levy Board and Government is fickle to say the least.

This surely is not the way to deal with one of the most important issues to face Racing, Bookmaking and Government in the past fifty years.

It is my own view that, if Betting Exchanges are to be allowed to continue, the number of people who should be permitted to make money out of horses losing races in Great Britain should be severely restricted and limited only to those people who are in possession of a Bookmaker’s Permit, which means that they have proved themselves to be a fit and proper person.

Not only would this resolve the issue of the legality of exchanges and the status of layers, but it would also more easily define the necessary regulation required, dramatically reduce the threat to integrity and would, at a stroke, bring all layers on exchanges within the same legal, tax and levy structure as traditional off-course bookmakers.

There will be those who disagree with my solutions but there is one recommendation which it should be not be difficult to support.

If you accept that the issue is not only one of critical importance, which came along too late for the Budd Report to review in detail, but is also one which has not yet been thoroughly thought through, you will, I trust, support my urgent call to Government to set up an Independent Commission of Inquiry into Betting Exchanges, their impact on the integrity of sport, on British Racing’s finances and on Government revenues. The importance of this issue prompted Australia to set up a National Task Force; Britain should do likewise. Nothing less than the future of one of Britain’s most prestigious sports and industries and one of the greatest contributors to Government revenues is at stake. If Betfair is genuine when it says, and I quote Mark Davies ‘Betting Exchanges are proactively working for the good of racing … We would like to help ensure that programmes like Panorama never need happen again ….. we want to make gambling cleaner and safer, while at the same time increasing substantially the amount of money coming into the industry’ then Mark Davies will, I hope, this afternoon in his speech support my call for an Independent Commission of Inquiry which will impartially and without prejudice outline the correct way forward on this most important of issues after the most thorough of investigations.